A forward contractis an agreement between two parties to exchange an asset at a specified price at a specified date. It is a contract so both parties are obligated legally to go through with the transaction. The buyer of the contract is long forward and the seller is short forward.

 These are traded over-the-counter and are not standardized, not traded on exchanges (not liquid) even though parties can find other parties to take their place in the contract, in essence selling it.

Futures contracts are like forward contracts, they're legally binding for both parties, and the transaction will occur on a specified date at a specified price, just like Forwards.

The major difference is that futures have less credit risk because they're standardized and are traded on major exchanges.

Purchasers and sellers of futures have to put down a deposit (initial margin) into a margin account (usually 3-6%). Every day a special exchange committee determines approximate closing price (settlement price).

We've done this in FinOp 304. Main Stuff:

If you buy calls/puts you're long, if you sell you're short.

They're the most liquid, being traded on option exchanges. They also have the least flexibility as far as their terms go. The price paid to obtain them is the option premium.

American Options allow you to buy/sell the asset at or before the date of maturity, whereas European Options allow you to buy/sell only on the date of maturity.

You can buy and sell options like you do with the other contracts, however, this means they can't be traded on the exchanges, so you can't buy and sell it whenever you want.

These are pretty self explanatory, just keep the basic philosophies in mind for diagrams.

If you buy a put you lose money if the stock goes up, and make money if the stock goes down. Opposite goes for writing a put.

If you buy a call, you lose money if the stock goes down and make money if the stock goes up. Opposite goes for writing a call

Remember that options are a zero sum game! Whatever one party makes, the other party has to lose.