Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Buy a call if you expect the value of a future to increase. Buy a put if you expect the value of a future to fall. The cost of buying the option is the premium. Traders also write options. Many futures contracts have options attached to the them. Gold options, for example, are based on the price of gold futures called the underlying , both cleared through the Chicago Mercantile Exchange CME Group.
The premium and what the option controls varies by the option, but an option position almost always costs less than an equivalent futures position. Buy a call option if you believe the price of the underlying will increase. If the underlying increases in price before the option expires, the value of your option will rise. If the value doesn't increase, you lose the premium paid for the option. Buy a put option if you believe of the underlying will decrease.
If the underlying drops in value before your options expires, your option will increase in value. If the underlying doesn't drop, you lose the premium paid for the option.
Option prices are also based on ' Greeks ,' variables which affect the price of the option. Options are bought and sold before expiration to lock in a profit or reduce a loss to less than the premium paid. When someone buys an option, someone else had to write that option.
The writer of the option, who can be anyone, receives the premium from the buyer up front income but is then liable to cover the gains attained by the buyer of that option. The option writer's profit is limited to the premium received, but liability is large since the buyer of the option is expecting the option to increase in value. Therefore, option writers typically own the underlying futures contracts they write options on.
This hedges the potential loss of writing the option, and the writer pockets the premium. This process is called "covered call writing" and is a way for a trader to generate trading income using options, on futures she already has in her portfolio. A written option can be closed out at any time, to lock in a portion of the premium or limit a loss.
To trade options you need a margin approved brokerage account with access to options and futures trading. You can also find quotes in the trading platform provided by options brokers. Buying options on futures may have certain advantages over buying regular futures. The option writer receives the premium upfront but is liable for the buyers gains; because of this, option writers usually own the own the underlying futures contract to hedge this risk.
Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.
A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. Options on Futures Many futures contracts have options attached to the them. Writing Options for Income When someone buys an option, someone else had to write that option. Trading Options Requirements To trade options you need a margin approved brokerage account with access to options and futures trading.
The Bottom Line Buying options on futures may have certain advantages over buying regular futures. A conflict of interest inherent in any relationship where one party is expected to act in another's best interests. Passive investing is an investment strategy that limits buying and selling actions. Passive investors will purchase investments How much a fixed asset is worth at the end of its lease, or at the end of its useful life.
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