What is Futures Options Trading?
Futures options are a great way to get involved in trading the futures markets, according to Learn-To-Trade.com. In fact, many new traders prefer to start trading futures options instead of trading straight futures contracts.
Investors unfamiliar with futures trading should take the time to read our introduction to Futures Trading before reading further.
Futures options trading is basically trading futures, but doing so with options. With futures trading, investors are obligated to purchase or sell a contract at a set price. An option, on the other hand, gives the investor the right, not the obligation, to buy or sell a futures contract at a designated strike price.
There are two main types of options: calls and puts. An investor interested in futures options trading would purchase a call option if they are bullish on the underlying price of the futures, meaning they expect it to move higher. Think of it like a rain cheque you get at a store. You have the right to buy the product when it comes in, but you are not obligated to buy it. Conversely, an investor would buy a put futures option if they were bearish on a futures contract and believed the price would move lower.
For example, if you are bullish on corn, you would buy a futures call option which gives you the right to buy one corn contract at a price that you choose (called the “strike price”).
The call futures option trader will realize a profit if the underlying futures price is above the option strike price by more than the initial investment—called the “premium”—paid for the option.
Advantages of Futures Options Trading
Futures options trading opens up a whole new realm for investing. It also allows investors to enjoy the benefits of future trading with less risk.
Instead of investing in individual stocks, with futures options trading, investors can speculate on a wide variety of commodities, including agricultural products, livestock, energy, metals, or financial products; anything so long as it is in its raw state.
Futures options trading is less risky than futures. When you trade futures, you are speculating on the future price of an underlying commodity with a set delivery date. If you enter a futures contract position, your risk is not defined, as the price can move significantly against you.
Futures option trading, on the other hand, is less risky than futures trading because the buyer of a futures option contract has the right, but not the obligation, to purchase a futures position with a limited risk equal to the premium they paid.
There are many other advantages to futures option trading. Futures options are highly leveraged investments. To buy a futures option contract an investor only needs to put up a small fraction of the total cost, known as the premium. With futures option trading, investors can control a contract for a fraction of the price without actually owning it.
It’s important to understand that futures option trading is an active investment, meaning investors need to watch their futures options regularly. Futures options move up and down on volatility, which is also responsible for the massive profits futures option trading investors can enjoy.
Taking a futures options trading course in Toronto, like those provided by the trading professionals at Learn-To-Trade.com, teaches members how to locate opportunities, read trends, understand market psychology, and exploit volatility to create wealth.