Futures Options Trading

When you understand more about futures options–that is, a futures
contract, which is always an option by definition–you will open up
the door for you to profit much more from your investments. A
futures contract obligates the buyer to buy an asset, or a seller to
sell an asset, at a predetermined price on or before a preset future
date. The futures contract will spell out the amount and type of the
underlying asset. Futures contracts are all written according to a
standardized format in order to facilitate their being traded on a
futures exchange. There are futures contracts that call for physical
delivery of the asset, while there are others that specify a cash
settlement. (In reality, physical delivery of assets specified in
futures contracts does not happen very much at all.) Futures traders
use the power of leverage, which is built into the very structure of
the futures market, in order to realize very, very large ROI
percentages.

Futures get used as hedges against risk as well as to speculate on
the price movement of assets, and it is from keen speculating that
much money can be made. Imagine if a producer of pork is able to use
futures contracts in order to lock in a certain price while hedging
against risk (if the price is locked in then even if the pork market
is down at the time of settlement he still sells for that price).
Meanwhile, any trader is able to speculate on pork’s price movement
by going long or short via futures contracts.

However, there is a technical difference between a defined “futures”
contract and an “options” contract. Options contracts give their
holders the right, without any obligation, to buy (or sell) the
underlying asset on or before the expiration date. But a futures
contract holder has the obligation to fulfill the terms of his
contract. The reason that futures contracts usually do not end up
with their terms of agreement fulfilled by physical asset delivery
is because they are so highly effective as instruments of hedging
and speculating without the contract holders needing to produce or
even own the underlying assets. Investors constantly go long or
short or even both together with two different contracts on the same
asset. The futures contracts themselves are usually what get bought
and sold, rather than the actual assets. But, investors’ and asset
holders’ bank accounts get credited just the same as if physical
sale and delivery of the assets was always what takes place.

Again, all options on futures as described above in the opening
paragraph use a futures contract as their instrument. It is the
holder of the futures contract who must fulfill the contract’s
specifications, not the purchaser of the option (options are
purchased for a “premium“). So, by learning strategies in how you
can trade in or speculate through futures contracts, you can use the
power of leveraging to minimize downside risk while potentially
amassing a fortune.

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