Calls, puts, premium, strike price — the next level after mastering futures
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CommoditiesJunior Trader
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The briefing paper
Futures vs forwards vs options
A futures contract is a standardized, exchange-traded agreement to buy or sell an asset at a set price on a future date — the clearinghouse guarantees both sides. A forward is a private deal between two parties with no exchange involved — flexible terms but no institutional guarantee. An option gives you the right but not the obligation to buy or sell — you pay a premium for the ability to walk away entirely.
What is hedging and why does it exist?
Hedging means using a futures contract to lock in a price and eliminate business uncertainty. An airline buys jet fuel futures to guarantee their cost next quarter. A wheat farmer sells futures before harvest to lock in today's price regardless of what happens in six months. Neither is speculating — they are removing risk that would otherwise threaten their business. Speculators take on that risk in exchange for the chance to profit from price moves.
The exchange and clearinghouse
Every futures trade goes through a regulated exchange — CME Group, ICE, Eurex. The clearinghouse stands between every buyer and seller, guaranteeing the trade regardless of what happens to the other party. This eliminates counterparty risk entirely. You never need to worry whether the other trader will pay — the clearinghouse will, every time.
Commodities vs equity futures
Commodity futures (oil, gold, wheat) can result in physical delivery of actual goods at specified locations. Equity index futures (S&P 500, Nasdaq) are based on a mathematical index value — impossible to physically deliver — so they always cash settle. Same daily mechanics, different underlying and settlement.
Glossary
Terms unlock as you complete stages. Start playing to build your glossary.