One the most excellent way to trade the futures markets are futures options. A lot of the new traders start by trading future options instead of straight futures contracts. Generally, there is a lesser risk and volatility when using options rather than futures. In fact, numerous professional traders only trade options.
But, before you can trade future options, each trader must learn the basics.
Option is the right and not the obligation to buy or sell a futures contract at a selected strike price. For the purpose of trading, you buy options to bet on the price of a futures contract to go higher or lower. The two main types of options are calls and puts.
Calls You will buy a call option if you think that the underlying future prices will increase. For instance, if you expect wheat futures to move higher, you would want to buy a wheat call option.
Puts On the other hand, you will buy a put option if you believe the underlying futures prices will go down. For example, if you expect corn futures to move lower, you will want to buy a corn put option.
Premium This is the term used for the price of an option. You are going to have to pay something when you buy an option. Just consider the pricing of options as a bet. The bigger the long shot, the less expensive they will be. Alternatively, the more sure the bet is, the more expensive the price is.
Stake Price This is the price at which you could either buy or sell the underlying futures contract. For instance, a September $ 5.30 wheat call allows you to buy a September futures contract at $ 5.30 anytime before the options expires. Most option traders do not convert options, they just close the option position and receive the profits.
Contract Months (Time) Options have an expiration date, these type of trading only last for a certain period of time. When you purchase an option, you cannot hold it for life. For example, a September wheat call expires in late December. You will have to close the position prior to expiration. Normally, the more time you have on an option, the more expensive it will be.
Further, futures contract allows its purchaser the obligations to buy the underlying asset and the seller to sell and deliver it at a present date. An investor can enter futures contract without shedding any funds or just at least deposit around 10% of the price of the underlying contract. However, future contract itself doesn't cost anything but a small commission. This type of trading represents a larger investment in an underlying asset. The contract would require the buyer either to purchase the goods' by deadline or sell the contract to a third party. So the financial obligation, according to principle, is potentially very large.
Future options trading gains are automatically marked to market' everyday. Any change in the value of position is automatically adjusted in the accounts of the contracting parties at the end of each trading day.
This kind of trading may carry a huge amount of risk, but are valuable for the leverage they offer an ability to control the funds that you invest.
