Our Options and Futures Presentation

1. Handsworth Investment Club
Futures and Options
(only for cool people)

2. Stock Markets
• Venues where companies list their shares and they are bought and sold by
traders and investors.
• Used by companies to raise capital via an initial public offering (IPO).
• Most trading in stocks is done via regulated exchanges.
• Play an important role in the economy as a gauge of the overall health in
the economy.
• Provide capital gains (profit on investment) and dividend income (money
given back to investor) to investors.
• NASDAQ, NYSE, TSX

3. Bond Markets
A bond is a security in which an investor lends money for
a defined period at a pre-established interest rate.
Bonds are issued by corporations as well as by
municipalities, states, and sovereign governments to
finance projects and operations.
The bond market lists securities such as notes and bills
issued by the United States Treasury

4. Forex Market
• Foreign exchange market.
• Participants buy, sell, and speculate on exchange
rates between currency pegs.
• The forex market is the most liquid market in
the world, as cash is the most liquid of assets.
• Made up of banks, commercial companies,
central banks, investment
management firms, hedge funds, and
retail forex brokers and investors.

5. Commodities Markets
• Producers and consumers meet to exchange
physical commodities.
• Agricultural products (corn, livestock,
soybeans)
• Energy products (oil, gas, carbon credits)
• Precious metals (gold, silver, platinum)
• “Soft” commodities (cotton, coffee, and sugar)

6. Cryptocurrency Markets
• Decentralized assets based on blockchain
technology.
• Exchanges host digital wallets for traders to
swap one cryptocurrency for another, or for fiat
monies such as dollars or euros.
• Popular crypto right now:
• Ethereum - market cap over $557 billion
• Bitcoin – market cap over $1.08 trillion
• Binance Coin - market cap over $104 billion
• Solana – market cap over $64 billion

7. Derivatives
Markets
• Derivative: Contract between two or more parties whose value is based on an
agreed-upon underlying financial asset (like a security) or set of assets (like an
index).
• Derivatives’ values are solely derived from the value of the primary security
that it is linked to. (ie. A payback card derives its value from a credit or debit
card).
• If the underlying asset increases, the derivative value will increase.
• Both futures and options exchanges may list contracts on various asset
classes, such as equities, fixed-income securities, commodities, and so on.

8. Why are derivatives
used?
• Speculation: People bet on something and try to
gauge the direction of the market. TRY TO EARN
PROFIT.
• Ie: Short Selling – borrow the security, sell the
security, then buy it back later
• You think a stock priced at $200 will go down. You
borrow the stock from a security dealer (Goldman
Sachs) sell the stock at $200 just before it goes
down to $150. You buy the stock back at $150. Your
profit is $50. Then you deliver the stock back within
the contract date.

9. Why are
derivatives used?
• Hedging: Enter a position to
reduce losses.
• If you think your portfolio will
go down, you want to try to
get into a position that will
minimize your losses.
• You sell a call option and get
a premium from another
investor.

10. Call Options

11. What is a Call Option
• A contract between a buyer and a seller.
• It gives the buyer of the call option a right, not the obligation, to
purchase a stock at a specific price by a specific date, by the option’s
expiration.
• Strike price: The price at which you can buy the underlying stock
• Premium: The price of the option, for either buyer or seller
• Expiration: When the option expires and is settled

12. What is a Call Option
• A call option is “in the money” when the stock
price at any time during the contract is above the
strike price.
• This allows the call owner to exercise the option,
buying the stock at the strike price.
• A call owner profits when the premium paid is
less than the difference between the stock price
and the strike price.

13. Example of a Call Option #1
• For example, imagine a trader bought a call for $0.50 with a strike
price of $20.
• The stock is $23 at expiration.
• The option is worth $3 (the $23 stock price minus the $20 strike
price)
• The trader has made a profit of $2.50 ($3 minus the cost of $0.50).
• If the stock price is below the strike price at expiration, then the call is
“out of the money” and expires worthless.
• The call seller keeps any premium received for the option.

14. Example of Call Option #2
• Royal Bank’s current stock price is at $130.
• You buy a call option contract to give you the right to buy 100 shares at a specific price
(strike price) of $130.
• The cost of contract is $2 per share or $200 total.
• Example:
• At the expiration of the contract, the stock price goes from $130 to $150.
• The difference is $20 a share. The owner of the contract has the right to buy at $130 but
the value is $150.
• This means that the contract is worth $2000 (the difference between the original value of
$13,000 and $15,000).
• The option contract is now worth $2000. You only paid $200 so you have made 10x your
money.

15. Why Buy a Call Option
• It magnifies the gains you make on
investment .
• For a small upfront cost, you can enjoy the
stock’s gains above the strike price until the
option expires.
• If you are buying a call, you will expect the
stock price to rise before expiration.

17. Futures
Contracts

18. What are Futures Contracts
• One party agrees with another party to buy or sell an
asset at a predetermined price at some point in the
future.
• Both parties have on OBLIGATION to honor the
contract.
• Both physical commodities and financial
instruments like stocks and bonds are traded
using futures contracts.
• Traded on public exchanges.

19. Futures
Contracts
Contract between a buyer and a seller of an asset. (stock,
index, commodity, currency)
They agree to exchange goods and money at a future date,
but at a price and quantity determined today.
Protect businesses and companies from price volatility.
“hedgers” trade futures to maximize the value of their assets,
and to reduce the risk of financial losses from price changes
“speculators” attempt to profit from price changes in futures
contracts
Have an expiry period.

20. What are Futures Contracts
An investor will give
a specific price that
he or she wants to
buy a commodity.
1
If the price of the
commodity goes up,
the investor will gain
money.
2
If the price of the
commodity goes
down, the investor
will lose money.
3

21. Stock Futures
• Stock futures investing lets you
trade futures of individual
companies and shares of ETFs.
• Exist for bonds and bitcoin.
• Difference between a stock option
and a stock future is that you have
an obligation to buy a stock future.

22. Example
• You buy a 6-month futures contract for stock XYZ at $300.
• The minimum shares (lot) is 100 shares.
• At the expiration of the future, the stock price is $400.
• You have a gain of $100 for each share.
• Multiply the $100 gain by the lot size (100) to get your total profit.
• The profit is $10,000
• The seller cannot step out because he has an obligation to sell, and
you have an obligation to buy.

23. Example:
• James is an investor who thinks the price of coffee beans is going to
go up in the next year.
• He finds a seller named Tonya and negotiates a futures contract with
her that specifies that he’ll buy 100 tons of coffee beans at $100 per
ton exactly one year from the date of signing.
• Nine months later, James sees that the price of coffee beans has
actually gone up: it’s now $120 per ton.
• The market price of 100 tons of coffee beans is $12,000. However, the
contract allows James to buy 100 tons for only $10,000.

24. Example Continued:
• He finds a coffee beans trader named Alix and sells the contract to
him for $11,000, $1,000 more than he would have paid for the coffee
beans at closure.
• Three months later, the contract closes, and the beans are still $120
per ton.
• James has made $11,000, Tonya has made $10,000, and Alix has 100
tons of coffee beans that he acquired at below market rates.