Future, Option and Swap are three types of stocks bought and sold in the stock market. Future means trading an instrument in the future, options give buyers the right to trade security in future and swaps are derivatives where two parties agree to exchange one stream of cash flow with another.
Future Trading
The future trading consists of trading of futures where the future contracts are traded on the futures exchange. The trading of future contracts or normally termed, futures involves buying or selling of some underlying instruments sometime in the future where the future date is called the final settlement date or delivery date and the pre-set price is referred to as the futures price. The price set on the underlying asset at the day of delivery date is called settlement price in futures trading.
Option Trading
Options are basically the financial instruments that give the buyers the right to buy or sell the underlying security within a point of time in the future for a price, which is fixed at the time when the option is bought. The stock option buyers are called the holders and sellers are called writers in option trading terminology. The ‘call’ in option trading gives the owner of option a right but not an obligation to buy an underlying security within the specified time while the ‘put’ gives the owner a right but not the obligation to sell the underlying asset within the specified time at a pre-fixed price. The value of a stock option contract is determined by five factors - the strike price, price of the stock, the expiration date, the cumulative cost that is required to hold a position in the stock and the estimated future volatility of the stock price. The strike price is referred to the price for which an option stock can be bought or sold. For calls, the stock price must go above the strike price while for puts the stock price should be below the strike price.
Difference between Futures and Options
A future contract generally gives its holders an obligation to buy or sell the underlying security, which is the major difference with the options contracts as the options give its holders a right but not the obligation to buy or sell the underlying security.
Swap Trading
The swap is a derivative where the two parties agree to exchange one stream of cash flow with another while the streams are called the legs of the swap. The cash flows involved in the swap trading are calculated over notional principal amount that is generally not exchanged between the counterparties.