Futures and Options (Derivatives)

Futures -- futures are obligations to buy or sell a specific commodity, such as corn or gold, on a specific day for a preset price.

Options -- options are the right to buy of sell a specific item, such as stocks or Treasury bonds, for a present price during a specified period of time. If the stock (underlying investment) or future markets move in the directions investor thinks they will, exercising the option can mean a healthy profit. Options are traded on stock or commodity exchanges at a specific price, which is the dollar amount an investor will pay or receive if the trade takes place. The market price rises or falls depending on the performance of the underlying investment on which the option is based.

Derivatives -- futures and options are derivative investments. These investments do not own the underlying investments, such as stocks or crude oil. Investors are betting on the future fluctuations of the underlying investments. For example, a crude oil futures contract is a bet on which way oil prices will move, without owning the crude oil.