Investing in Futures Options require an investor to go through a sequence of successive trading positions. This type of trading platform has a monthly expiry date that causes the traders to close current position on expiration near the end of every month and start a fresh position with longer expiry date. Therefore, being an F&O trader, you must keep in mind that you’re dealing with a leveraged alternative to oh-so underlying securities like gold, oil, bonds etc. Many new traders start their trading career with futures options rather than direct futures contracts as the former involves less monetary risk and volatility compared to the latter one. In fact, many traders across the globe prefer to trade in futures options only.
If you’re interested in trading in this podium to make significant amount of money on a regular basis without taking the risk of breaking your bank, futures options can be a good option for you. Here are the fundamental of the concerned financial niche.
What are futures options?
This is the most basic question that every novice trader has in their mind. An option is a right to purchase or sell a futures contract at an allocated strike price. From trading scenario, you purchase options and expect the rate of the futures contract to move higher or lower.
What are different types of options?
There are mainly two types of futures options and those are, call option and put option.
- Call options – This option works fine if you expect the underlying futures rate is likely to move up; e.g., if you believe that the wheat futures will move higher, then you can purchase a wheat call option.
- Put options – This option is right while you expect the underlying futures price to reduce; e.g.; if you think that the corn futures will move in the southward direction, you may buy a corn put option.
What is premium?
Irrespective of the type of options, you must pay some cash to buy the option. Premium is the formal term to describe the price of the option. You can consider this pricing as gambling. The surer the gamble is the pricier it will be and vice versa.
What is the expiration?
Every option has a certain expiry date, that means the options last for a particular period of time. An option bought can’t be held for uncertain period of time. If you buy a March wheat call, it will expire in late February. You must close your position before the expiry date. Usually, the more time you will have on an option, the costlier it will be.
What is strike price?
This can be considered as the rate at which one can purchase or sell any particular underlying futures contract. For instance, a November $4.50 wheat call option allows a trader to purchase a November futures contract at $4.50 any time prior to that option expires. Generally, traders don’t convert options and simply close their position to take the profit.
Buying an option – An example
You buy: 1 September $700 gold call at $16
- 1 denotes the number of options you’re purchasing
- September is the month for the option contract
- $700 is the strike price
- Gold is the underlying futures contract
- Call is the chosen option type
- $16 is the premium
You may find a list of good brokerage houses on the websites of any leading financial advertising agency. Any brokerage company that believe in better public relations offer facility of futures options to any trader who qualify for basic trading criteria.
Samon Bagons is a financial writer who has profound knowledge on the contemporary financial world. He loves to contribute his articles to various financial communities, websites and blogs so that people who are going through distress, can read and help themselves get out of the debt mess.