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Options on Futures, also known as "Futures Options", is an unique form of derivative instrument as it is a "Derivative on Derivative", which is a derivative instrument coming out of another derivative instrument rather than an equity or commodity asset. Find Out How My Students Make Over 45% Per Trade, Confidently, Trading Options In The US Market Even In A Recession!
Options on Futures are created when futures are created for the trading of an asset and then options are created to trade those futures contracts at specific strike prices. When Options on Futures are exercised, futures contracts exchange hands between the long and the short and when the resultant futures contract expires, the underlying asset is traded between the long and the short of the futures contracts if it is a physically settled futures contract and if it is a cash settled futures contract, the long and the short of the resultant futures contract simply settle their wins and losses in cash. It is recommended for you to have a complete knowledge and some experience in futures trading before attempting to trade Options on Futures.
Options on Futures work exactly the same way stock options work except for the fact that upon exercised, what you get is a futures position instead of an asset. When a call options on futures is exercised, the buyer of the futures options receives a long position in the underlying futures contract after paying initial margin requirement and a payment in cash equal to the difference between the current futures price of the futures contract and the strike price. Assuming you bought 1 contract of Call S&P500 Futures Options on its March Futures with strike price of 1000.
Conversely, the seller of the call futures options receives a short position in the underlying futures contract after paying initial margin requirement and also pays the long in cash the difference between the prevailing futures price and the strike price. Assuming you Sell To Open (shorted) 1 contract of Call S&P500 Futures Options on its March Futures with strike price of 1000. When a put options on futures is exercised, the buyer of the futures options receives a short position in the underlying futures contract after paying initial margin requirement and a payment in cash equal to the difference between the current futures price of the futures contract and the strike price.
Assuming you bought 1 contract of Put S&P500 Futures Options on its March Futures with strike price of 1000. You receive a short position on 1 contract of S&P500 March Futures shorted at 1000 points and pays SPAN initial margin requirement of $29,100 (970 x 250 x 12%).
Conversely, the seller of the put futures options receives a long position in the underlying futures contract after paying initial margin requirement and also pays the short in cash the difference between the prevailing futures price and the strike price. Assuming you Sell To Open (shorted) 1 contract of Put S&P500 Futures Options on its March Futures with strike price of 1000.
You receive a long position on 1 contract of S&P500 March Futures bought at 1000 points and pays SPAN initial margin requirement of $29,100 (970 x 250 x 12%). Initial margin for the underlying futures position would need to be paid according to the prevailing futures price upon exercise in order to take delivery on the underlying futures. As Options on Futures are options based on futures contracts and not the underlying asset behind that futures contract, traders of Options on Futures are really speculating on the price of the futures contracts instead of the price of the underlying asset behind that futures contract. As such, you should be buying Call Options on Futures when your outlook on the futures price of a particular futures contract is sustained bullish and shorting Call Options on Futures when your outlook is moderately bearish.
Just like stock options, Options on Futures comes in both European Style Options as well as American Style Options. On top of these two broad categories, there are also Options on Physically Delivered Futures as well as Options on Cash-Settled Futures.
Based on the kind of futures contracts the options are written on, Options on Futures are also known according to the type of futures. The most obvious reason for the use of Options on Futures is when an asset has no options available for trading but only futures and Options on Futures.
Some Options on Futures such as those traded on the Chicago Mercantile Exchange, CME, actually trades around the clock providing a 24hours centralised global marketplace.


Indeed, hedging futures positions with Options on Futures is one of the most important usage for Options on Futures. When you are long futures and you wish to completely protect your futures position from any downside risk beyond a certain price, you can simply buy Put Options on Futures for that futures contract at the specific strike price.
The article opens with an overview of options on futures trading strategies split into bullish market strategies, bearish market strategies, neutral market strategies, and special market strategies. Some of the most common contracts investors trade options on are listed below, though this list is by no means complete. This futures options trading booklet produced by the NFA does a good job of introducing futures traders to options trading, starting off with the vocabulary of the market and the special meaning it may have when used in the context of options trading.
When stock options are exercised, shares of the underlying stock exchange hands between the long and short. When you buy a call options on futures, you own the right but not the obligation to buy the underlying futures contract at a fixed price and when you buy a put options on futures, you own the right but not the obligation to short the underlying futures contract at a fixed price. This is because a buyer of a call options on futures would only exercise the option when it is In The Money.
Assuming S&P500 rallies and its March Futures rallies to 1030 points and you decide to exercise your call options and take delivery on the S&P500 March Futures. Assuming S&P500 rallies and its March Futures rallies to 1030 points and the call options on futures is exercised by the buyer of the options contract. This is because a buyer of a put options on futures would only exercise the option when it is in the money.
Assuming S&P500 drops and its March Futures drops to 970 points and you decide to exercise your put options and take delivery on the S&P500 March Futures.
Assuming S&P500 drops and its March Futures drops to 970 points and your short put options were exercised by the buyer. This is because futures prices do not usually move in tandem or at the same price as their underlying asset before expiration. Conversely, you should be buying Put Options on Futures when your outlook on the futures price of a particular futures contract is sustained bearish and shorting Put Options on Futures when your outlook is moderately bullish (Read more about the Six Different Outlooks In Options Trading).
European Style Options on Futures can only be exercised upon expiration if the options are in the money while American Style Options on Futures can be exercised for the underlying futures contract at anytime prior to expiration.
Options on Physically Delivered Futures are options written on futures contracts that ultimately end with the trading of the physical commodity behind the futures contract while Options on Cash-Settled Futures are options written on futures contracts that ultimately end with the settling of wins and losses in cash between the long and the short without any trading of the underlying commodity.
Some examples are; Options on Index Futures, Options on Forex Futures, Options on Commodities Futures etc. In this case, trading Options on Futures is the closest one can get to trading options on the underlying asset itself. Apart from being a price speculation tool, one of the most important use for Options on Futures is for hedging against futures positions.
Depending on your specific futures position, there are a few simple ways to hedge using Options on Futures. The risk of loss in futures trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Options on futures options allow for a wide range of investment opportunities, but are still a speculative investment and thus investors should be aware of the risk of loss involved.
Similarly, Options on Futures are simply options with futures contracts as their underlying asset.


That is when the strike price of the futures option is lower than the current futures price of the futures contract.
That is when the strike price of the futures option is higher than the current futures price of the futures contract. As in the examples above, when you trade an S&P500 Futures Options on its March Futures, you are speculating and profiting from the price movement of the March Futures and not the S&P500 index itself. This also means that you can perform all kinds of options strategies using Options on Futures.
Almost all commodities have both physically delivered as well as cash-settled futures contracts and with both European Style Options and American Style Options available on both kinds of futures contracts in the form of both call and put options, the tree of derivative instrument behind a single commodity can be really huge. However, in today's comprehensive derivatives market, there are options available directly for trading on most assets. Futures positions comes with unlimited risk which can easily go into a margin call if one is not careful. Using this options on futures strategy, you will completely hedge against any price declines below the strike price of the put futures options. Using this options on futures strategy, you will completely hedge against any price rallies above the strike price of the call futures options. However, Options on Futures are options that derive their value from another derivative instrument, Futures, which in turn derive their value from an underlying asset such as an index or commodity. In fact, futures prices and the price of their underlying asset can sometimes move in opposite directions! This is particularly useful for commodities that do not have options offered on them directly. In fact, whole multinational coorporations and banks have collapsed from careless futures trading. However, if you are only expecting a small decline in the price of the futures position, you could hedge the position by shorting at the money or slightly out of the money call options on futures.
However, if you are only expecting a small increase in the price of the futures position, you could hedge the position by shorting at the money or slightly out of the money put options on futures.
This is why it is important to have a solid fundamental knowledge in futures trading before attempting to trade Options on Futures.
By hedging existing futures positions with options on futures, one could limit one's futures trading risk exposure greatly.
When writing call futures options against your futures position, the premium received from the sale offsets slightly any decline in price of the futures position as long as the futures price remain below the strike price. When writing put futures options against your futures position, the premium received from the sale offsets slightly any increase in price of the futures position as long as the futures price remain above the strike price.
However, if the futures price rises above the strike price, your futures position may be called away if the call options are exercised by the buyer.
However, if the futures price falls below the strike price, your futures position may be called away if the put options are exercised by the buyer.



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Author: admin | 17.10.2015 | Category: Best Discount Broker


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