Options give investors the security of knowing they can buy or sell at a certain price, but want the chance to profit if the market price suits them better at the time of delivery. For a certain fee an Option gives them the right to buy or sell at a certain price.
An Option to sell, known as a put option, would only be exercised if the price set in the futures contract was higher than the market price at the time of harvest, and vice versa for an option to buy, also known as a Call Option.
When you buy an Options contract you are granted the right to buy or sell the underlying futures contract at a certain price level, called the Strike Price. It is called an Option because there are two types of Options: the Call Option which allows you to buy the futures contract, and the Put Option which allows you to sell the futures contract.
A Futures contract is where you buy a commodity or product at a set price in advance. That is to say, you predict that a certain time in the future, the product will be worth the amount you say it will be. A Futures trade can last a very short time, from a few minutes of hours, to a few days or weeks. Futures are legally binding agreements to buy and sell something in the future. Futures contracts are taken out on anything from live cattle, pork bellies, wheat, gold to foreign currency and can be traded on many exchanges around the world.
The buyer and seller agree on a price today for a product to be delivered and paid for in the future. Hence the name. All Future contracts are standardised. This means the quantity and quality of the item is fixed. You can then sell at the prearranged price no matter what the market rate is. Most Futures contracts are settled with cash on the date that delivery is due, with the holder paying or receiving the difference between the price set in the contract and market price.