Futures Options Trading is available free to help both experienced and beginning futures market traders. You may also register free to receive our special advanced options trading info: Cannon Trading respects your privacy, all transactions are safe and secure with High-grade Encryption AES, bit keys.
We do not sell your information to third parties. Have you ever wondered who sells the futures options that most people buy? Their sole objective is to collect the premium paid by the option buyer. Option writing can also be used for hedging purposes and reducing risk. An option writer has the exact opposite to gain as the option buyer.
The writer has unlimited risk and a limited profit potential, which is the premium of the option minus commissions. When writing naked futures options your risk is unlimited, without the use of stops. This is why we recommend exiting positions once a market trades through an area you perceived as strong support or resistance. So why would anyone want to write an option? Here are a few reasons: Most futures options expire worthless and out of the money.
Therefore, the option writer is collecting the premium the option buyer paid. There are three ways to win as an option writer. A market can go in the direction you thought, it can trade sideways and in a channel, or it can even go slowly against you but not through your strike price.
The advantage is time decay. The writer believes the futures contract will not reach a certain strike price by the expiration date of the option. This is known as naked option selling. To hedge against a futures position. This allows you to collect the premium of the call option if cocoa settles below , based on option expiration.
It also allows you to make a profit on the actual futures contract between and This strategy also lowers your margin on the trade and should cocoa continue lower to , you at least collect some premium on the option you wrote. Risk lies if cocoa continues to decline because you only collect a certain amount of premium and the futures contract has unlimited risk the lower it goes.
Cannon Trading Company Inc. Be strict when choosing which futures options to write and don't believe in writing options on futures as your only strategy. Using the same strategy every month on a single market is bound to burn you one month, because you end up writing options on futures when you shouldn't. We believe you should stay with the major trend when writing futures options, with rare exceptions.
Use market pullbacks to support or resistance as opportunities to enter with the trend, by writing futures options which best fit into your objectives. Volatility is another important factor when determining which options on futures to write, it's generally better to sell over valued futures options then under valued futures options.
Remember not to get caught up with only volatility, because options on futures with high volatility could always get higher. The bottom line is, pick the general market direction to become successful over the long-term.
We also believe in using stops based on futures settlements, not based on the value of the option. If a market settles above or below an area you believed it shouldn't and the trend appears to have reversed based on the charts, it's probably a good time to exit your positions. We can help you understand the risks and rewards involved, as well as how to react to certain situations, i. We can either assist your option writing style or recommend trades and strategies we believe are appropriate, using the above guidelines.
Most futures options expire worthless and out of the money, therefore most people lose when buying options on futures. Cannon Trading believes there is still opportunity in buying , but you must be very patient and selective. We believe buying futures options just because a market is extremely high or low, known as "fishing for options" is a big mistake. Refer to the guidelines on our "Trading Commandments" before purchasing any futures options. Historic volatility, technical analysis, the trend and all other significant factors should all be analyzed to increase your probability of profit.
All full-service accounts will receive these studies, opinions and recommendations upon request. Cannon Trading Company's "Trading Commandments" can be used as a guideline to assist you in the process and decision making of selecting the right market and futures options to purchase. A common strategy we implement involves the writing and buying of futures options at the same time, known as bull call or bear put spreads.
Ratio and calendar spreads are also used and are recommended at times. Please do not hesitate to call for help with any of these strategies or explanations.
Here are a few examples we use often: If coffee is trading at 84, we can buy 1 coffee call and write 2 calls with the same expiration dates and 30 days of time until expiration. This would be in anticipation of coffee trending higher, but not above in 30 days. We'd be collecting the same amount of premium as we're buying, so even if coffee continued lower we'd lose nothing. Our highest profit would be attained at based on options on futures expiration.
To determine risk we'd take the difference between and , which is 35 points and divide it by two, because we sold two calls for every one purchased. You'd then add the Risk lies if coffee rises dramatically or settles over A typical calendar spread strategy we use often would be to write 1 option with about 25 days left until expiration and buy 1 with 60 days left.
If coffee was trading at 84 and we thought prices might be heading slowly higher. We can write 1 coffee call with less time and buy 1 coffee call with more time in the anticipation that the market will trend higher, but not above the strike before the first options on futures expiration. Some additional risk here lies in the difference between the two contract months. The objective is, if coffee trades higher over the next month but not above the strike price, we'd collect the premium of the option we sold by letting it expire worthless.
In addition, the option we purchased may also profit if coffee rises higher, but it may lose some value due to time decay if coffee doesn't rally enough. Some futures options trade based on different futures contract months and should always be considered in your trading. Don't hesitate to call for help with any of these strategies or explanations. Remember, the key is still going to be picking the general market direction correct.
Therefore, you must analyze and study each market situation with several different trading scenarios and determine which one best suits your risk parameters. The art of trading these strategies is deciding when, where, which futures markets, and what ranges to use. If you are an inexperienced options trader use these strategies through the broker assisted program. The material contained in 'Futures Options Trading ' is of opinion only and does not guarantee any profit.
These are risky markets and only risk capital should be used. Past results are not necessarily indicative of future results. Futures Options Trading First Steps: When Futures Options expire, they are worthless. Most of the time, Futures Markets have no trend. Futures Options Trading Spread Strategy Description Reason to Use When to Use Buy a call Strongest bullish option position Loss limited to premium Undervalued option with volatility increasing Sell a put Neutral bullish option position Profit limited to debt Small debit, bullish market Vertical Bull Calls Buy call, sell call of higher strike price Loss limited to debt Small debit, bullish market Vertical Bull Puts Buy put, sell put of higher strike price Loss limited to price difference Large credit, bullish market.
Futures Options Trading Spread Strategy Description Reason to Use When to Use Buy a put Strongest bearish option position Loss limited to premium Undervalued option with volatility increasing Sell a call Neutral bearish option position Profit limited to premium Option overvalued, market flat, bearish Vertical Bear Calls Buy at the money put, sell out of the money put Loss limited to debt Small debit, bearish market Vertical Bear Puts Sell call, buy call of higher strike price Loss limited to stroke price difference minus credit Large credit, bearish market.
Undervalued option with volatility increasing. Buy call, sell call of higher strike price. Buy at the money put, sell out of the money put. Sell call, buy call of higher strike price. Loss limited to stroke price difference minus credit. Trading range market with volatility peaking. Sell near month, buy far month, same strike price. Buy at the money call put , sell 2 out of the money calls puts , buy out of the money call put.
Futures Options have time premium and market in trading range. Buy call, sell calls of higher strike price. Large credit and difference between stroke price of option bought and sold. Buy futures, buy at the money put, and sell out of the money call.More...