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Understanding the Basics of Futures Options

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Understanding the Basics of Futures Options Powered By Docstoc
					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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