New traders who would like to test the waters of the trading world may opt for future options instead of going right away into futures contracts. However, they have to get a clear understanding of the concepts related to it for them to get the most from their investments. A futures option is a right to buy or to sell commodities at an agreed strike price through a futures contract. Traders buy options at present as they bet on the price of future contracts to increase or decrease at a given time in the future. Those who engage in futures option mostly settle the agreements in cash. This may be an advantage to investors who do not have enough capital to pay for the value of the underlying assets such as commodities. There are specific terms that new traders have to learn before they plunge themselves into the trading business through the futures options. Calls Traders may consider buying call options if they think that the price of the underlying commodities will increase. If they expect that the prices of corn futures will rise for example, then they may think of buying corn call options. Puts On the other hand, if traders expect the underlying commodities to decrease in price in the future, they may opt to be buying put options instead. Premium Traders have to pay some fee or price when they buy either a call option or a put option and this is called the premium. However, the prices may vary depending on whether the bet is more likely to happen or not in the near future. Traders will have to pay higher prices for options that they are most certain will happen at a given time frame. Contract Months The contract months refer to the timeframe. Call and put options do not last forever as they are bound to expire. Traders will have to decide to close their position before the date of expiration comes. Those who have longer time to hold their options generally will have to pay more for it as these options are more expensive. Strike Price Traders may sell the underlying contract on the commodities before it expires. Traders usually do not decide on converting their options but they just close their positions and reap their profits that they have earned. Commodities such as gold for example may be expected to increase in a few months time. Traders may then buy a gold call option in order for them to gain profit from it when the prices rise before the expiration date. There are many ways to trade futures options. You can use different techniques that combine commodity options together to trade with little risk. Seasoned traders know that they have to limit risks as much as possible.
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