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When you purchase a
"futures contract" on a commodity like
wheat or corn, you are committing to purchase a certain
amount of the commodity at that price at time of
delivery. The delivery dates differ for each commodity,
but the grain markets seem to have the same delivery
dates.
If you think the market
will go up and you buy a contract and the price of the
commodity goes up, you can sell your contract at that
price, before delivery and collect the difference. If
the price goes down you have to sell and pay the
difference. I would suggest selling, unless you want
5,000 bushels of wheat or whatever, delivered to your
front door! I wouldn't worry though. If you "would'
happen to forget that the delivery date is near, your
brokerage will notify you!
If you think the market
will go down, you can "short" or sell a
contract. In effect, you would be selling now and if the
price goes down you would buy it back at a cheaper price
and collect the difference. You would lose money though,
if the price goes up.
An "option"
is also a contract, but it gives you the "rights"
to purchase or sell a futures contract on a commodity at
a certain price, But not the "obligation".
You can buy a "call"
option if you think the market is going up, or buy a
"put" option if you think the market is
going down.
You pay a certain price
for your option, and it will change in value according
to several factors, including not only direction of
movement of the market, but also volatility and other
factors.
You can sell your
option when you want, if you have a profit or loss, or
just let it expire worthless at the closing date. You
are not obligated to do anything with it.
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