Futures Options Contracts
Jan0
I want to go over a common concern with futures options trading. I only recommend and teach selling options if you are covering them by buying options. Sold options that are not covered are called “naked options”. That means that if there is a move against you, and you did not also buy options, there is potential unlimited loss.
If you did cover your sold position by buying a future option as protection, you are no longer naked. Now even if a sold option is covered some still feel nervous if an option they sold is exercised into a futures contract. The buyer of an option has the right at any time to exercise their option. Let’s assume you sold a call option to someone. They exercise the option and now they are long a futures. That means you are short the futures. Should you be concerned?
Two things to consider:
You have unlimited loss potential whether you are selling a futures option or long or short a futures contract. So the fact that someone exercises an option should not worry you more. Either way, there is unlimited loss potential. But you always want to cover the position. So either way, now that it is covered, you do not have unlimited loss potential.
The second thing is that you should be happy if the seller exercises it if there is still time value left. When they do this, they are giving up on some of the time value. So if there is $100 time value left and the buyer exercises the option, he gives up that time value when he gets the futures. So either way, don't worry if you are protected.
If you only sell uncovered or naked options because you do not want to spend the money to buy options as protection, you might want to re think your strategy. Find cheap options to cover your sold options instead of being naked.
Mail this postPopularity: 4% [?]
Futures Options and Spreads
Jul0
Please only use these future option examples for educational purposes.
Paper trade them.
I normally write about spread options. Today I want to first take a look at a futures spread. Let’s look at a natural gas/heating oil spread. This is buying one natural gas futures and selling one heating oil futures.
Below are daily, weekly and monthly charts:
Daily
http://deltaneutraltrading.com/062709.bmp
Weekly
http://deltaneutraltrading.com/062709b.bmp
Monthly
http://deltaneutraltrading.com/062709c.bmp
You can trade this as a spread using options. You do not have to just buy and sell the futures. You can buy a call and buy a put instead so you are limited in your potential loss. Even though futures spreads can have less risk, there is still the possibility of unlimited losses.
With buying options, you are limiting the risks. You no longer have unlimited loss potential. But the problem is that you are buying premium. So instead of just buying options, you can buy and sell credit spreads.
For example, from looking at the above chart, we can buy an at the money natural gas call option and sell a natural gas out of the money call. Then we sell an at the money heating oil call option and buy an out of the money heating oil option. We expect the natural gas futures to rise in comparison to the heating oil futures because of the chart.
I go over these types of option spreads in my course. And I look at some market combinations that you might not have thought of. Don’t just use these for the obvious spread markets like, wheat/corn, t-bond/t-note. There are other market combinations for spreads and other ways to come up with the option spreads. You can create a spread using more than one market instead of just two markets. You can also create option combinations that are not typical credit or debit spreads. Think outside the box with commodities options.
Mail this postPopularity: 15% [?]
Understanding The Advantages of Futures Options
May0
Over the last decade, the popularity of options has grown significantly. According to the data compiled by the Options Industry Council, the volume of options contracts traded on U.S. exchanges in 1999 was approximately 507 million. By 2007, that number grew to more than three billion, thus setting an all-time record.
Though futures options are quite risky investments that can only be understood by expert traders options can be very useful to the individual investor as well.
Futures Options can also add value to your portfolio and have several other advantages that are definitely worth noting. A few are outlined below and will help illustrate reasons why options have gained so much popularity in such a relatively short period of time.
The first advantage of options on futures is that they can provide increased cost efficiency. Since they possess great leveraging power, you the investor can obtain a great option position that nearly mimic a futures position but save you unnecessary cost.
The second advantage is that they provide less risk when used correctly. While there are situations where buying options is actually riskier than owning the futures, but they can also be used to reduce the amount of risk incurred. Futures options can be less risky because they require less financial commitment than equities. They are also the most dependable form of hedge which makes them safer than stocks.
The third advantage of futures options is they provide higher potential for returns. This means you can spend a lot less and make nearly the same profit as you would with the underlying futures. This gives you a higher percentage return.
The fourth and final advantage discuss in this article pertains to the strategic alternatives futures options provide. Options are a very flexible tool and provide many ways to recreate other positions. These positions are known as synthetics. Synthetic positions provide you the investor multiple methods of attaining the same investment goals which can prove extremely useful.
The four points outlined above are the key advantages futures options offer and are a contributing factor to their growing popularity. If used correctly, they present less risk than straight futures and can actually save you unnecessary costs while providing you the same profit. This is important to consider when selecting a type of investment. You want to get the most out of your money and futures options provide several ways of making this happen. Take the time to review this information before ever making a buying decision. Make sure you understand how you will benefit from the decision you make and what it will mean for you in monetary terms.
Before you decide on a particular investment, consider the key advantages and weigh the risks of each possibility against what you are willing to lose. Be sure you understand how to correctly utilize futures options in order to get the most out of them. You are investing for your future so think wisely and choose carefully. The more you know, the closer you’ll be to a more secure and prosperous future.
Mail this postPopularity: 6% [?]
