What are futures contracts?

Definition: A futures contract is a contract between two parties where both parties agree to buy and sell a particular asset of specific quantity and at a predetermined price, at a specified date in future. Description: The payment and delivery of the asset is made on the future date termed as delivery date.

What is a futures contract explain with example?

Futures—also called futures contracts—allow traders to lock in the price of the underlying asset or commodity. These contracts have expiration dates and set prices that are known upfront. Futures are identified by their expiration month. For example, a December gold futures contract expires in December.

How do oil futures options work?

Oil Futures. Options contracts give purchasers the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset at a preset strike price. The most a crude oil option holder can lose is the cost paid for the option, rather than the cost of the underlying futures contract.

How much oil is in a futures contract?

1,000 barrels
Crude oil futures are 1,000 barrels per contract, traded from 6:00 p.m. U.S. until 5:00 p.m. U.S. ET, all months of the year.

How are futures contracts created?

Futures contracts are not issued like other securities, but are “created” whenever open interest increases; that is, when one party first buys (goes long) a contract from another party (who goes short).

How can I buy oil futures?

Buy Oil Futures Directly. Your first option is to buy and sell oil futures directly through a commodities exchange. Some of the most popular are the New York Mercantile Exchange (NYMEX) and the Chicago Mercantile Exchange (CME or CME Group). You can also purchase through a broker like TradeStation.

How do you buy oil futures options?

If you choose to buy futures or options directly in oil, you will need to trade them on a commodities exchange. The more common way to invest in oil for the average investor is to buy shares of an oil ETF. Finally, you can also invest in oil through indirect exposure by owning various oil companies.

How long does a futures contract last?

Futures contracts can be traded purely for profit, as long as the trade is closed before expiration. Many futures contracts expire on the third Friday of the month, but contracts do vary so check the contract specifications of any and all contracts before trading them.

What are the three types of futures?

The different types of futures contracts include equity futures, index futures, commodity futures, currency futures, interest rate futures, VIX futures, etc. The concept across all the types of futures is the same. They are all a contract between a buyer and seller for delivery at a future date.

What are the advantages of futures contract?

There are many advantages and disadvantages of future contracts. The most common advantages include easy pricing, high liquidity, and risk hedging. The major disadvantages include no control over future events, price fluctuations, and the potential reduction in asset prices as the expiration date approaches.