Futures Markets - Part 11: Options on Futures
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Futures Options are financial contracts that are often overlooked by traders, but due to their unique characteristics, the advantages of options trading might be worth looking into. As a trader you can utilize futures options as a trading tool for a long term outlook on physical Gold, Crude Oil, etc and financial futures Stock Indicies, Bonds, etc. The buyer of an option has the right, but not the obligation in contrast to futures and spot trading option and future trading, to buy or sell the underlying asset such as a commodity or a stock at a certain price on, or before a certain date.
The buyer of the option pays a fee for the option the premium to the seller. The strike price of the option is the price at which the option can be exercised at.
Options have an expiration date, which means that if they are not exercised before a certain date, they expire worthless. The upside potential for buying call options is, therefore, unlimited theoreticallywhereas the potential loss is limited.
The 4 basic scenarios when buying and selling put or option and future trading options are displayed in the following table. There are 5 major benefits of trading options, which could help traders overcome the most common problems when trading futures or spot. The potential losses when buying calls and buying puts are limited to the premium paid, whereas the upside is almost unlimited when buying calls and puts. A common problem among futures traders is that they do not use stop loss orders, use mental stops that are not executed with discipline, or continuously widen their stop loss order when the trade goes against option and future trading.
When buying options, the risk is predetermined and it is limited to the premium paid. Option and future trading you have bought a call or a put, volatility only has a limited impact and, especially important, your option will remain valid even if the price moves against you substantially; the greatest limiting factor in options trading is time. This advantage is a consequence of the previous point. Often, traders are better at picking the broad market direction, but their timing and their stop loss placement is off, which then results in unprofitable trades although they can see that price eventually made it to their initial take profit.
When buying options, the entry timing of trades has a option and future trading impact and the influence of stop loss orders is not option and future trading at all, but knowing the broad direction is more important. Revenge and over-trading are among the most commonly made emotionally caused trading mistakes and they are the result of inferior coping mechanisms when it comes to realizing losses. Traders option and future trading personalize losses and after a loss still believe that their trade idea is right, which then causes them to open another trade, often without valid entry option and future trading and purely based on impulsive reactions.
When buying options, the impacts of stop loss orders are removed because the only option and future trading that determines whether you lose or make money, is the price of the underlying asset when the option expires. During an options trade, you do not get direct negative feedback about your position which can potentially remove the impacts of emotionally caused trading decisions to some degree.
Due to the unique characteristics of options and the way their payoff is structured, different types of option contracts can be combined to capitalize on very specific market behavior. Whereas a futures trader is limited to either trade with buy or sell orders, an options trader can choose from a variety of scenarios and, therefore, tailor his trading methodology around his personal needs, his investing perspective and the trading tools used.
If you want option and future trading know more, Optimus maintains a wide selection of online commodities trading platforms to help you become an effective trader. Or contact one of our friendly staff to talk about your needs and we help you find the best option and future trading for you! Optimus Futures is a leading online futures broker that caters to traders seeking fast execution and stable data feeds combined with aggressive margins and deep discount commissions.
Focus on Factors in Your Control. About Optimus Futures Optimus Futures is a leading online futures broker that caters to traders seeking fast execution and stable data feeds combined with aggressive margins and deep discount commissions.