While original futures and options contracts were established with the purpose of real physical delivery when the contract elapsed, this is often not the case nowadays. When it comes to trading derivatives, emini trading is definitely among the most popular trading strategies because of many advantages it carries. Futures options trading involves buying an option contract in which the underlying asset is a futures contract. When a trader buys a futures option they pay a premium and become entitled to, but not required to, buy a specific futures position at a prearranged price at any time during the life of the option contract. For the duration of the contact, the option holder may also sell the option contract at an increased price to realize a profit, or they may sell at a loss to avoid losing their entire premium if they believe that the option is in danger of expiring worthless. Like many types of options, futures options may be used for speculative trading which aims to take advantage of movement in price of the underlying asset.
Upon expiration date, if the option contract has not been sold and is in-the-money, it will be settled. Many traders involved in futures options trading do not intend to exercise their options by buying futures.
As with stock options, futures options’ premiums are based primarily on the value of the underlying asset.
In the calculation of option premiums, there are several factors taken into account, including the gap between the current futures price and the strike price.
Most options expire the month before the expiration of the underlying futures contract; usually near the end of the month on a Friday. Trading future options can be a viable and profitable way of capitalizing on the movements in the futures markets with less risk and outlay than actually trading futures. Future is a contract in which two parties agree to exchange physical commodity or a set of financial instruments on an exact future date at a particular price.
Like stock options, futures options are priced at a percentage of the cost of the underlying asset. This settlement is often in the form of the underlying future; however, there are also futures option contracts that settle in cash. They simply plan to take advantage of the movement of the futures value by selling their options for a higher price than the premium they paid.
In this case, the asset is the futures contract, and not the commodity on which the future is based.
According to this gap, the option may be deemed out-of-the-money, at-the-money, or in-the-money.
With an understanding of both futures trading and options trading, this area may present some attractive trading possibilities. That is why futures options trading is not only in domain of producers and consumers, but also speculators play a great role in this market. This means that trading futures options enables a trader to participate in the arena of futures trading for a smaller outlay of capital. While futures prices tend to mirror commodity prices fairly closely, in order to make accurate trading decisions, the main focus must be on the futures price.
Another factor is the length of time before expiration of the option – generally more time translates to a higher premium, as the contract has a better possibility of attaining a profit.
Options on the other side give the buyer the right to buy or sell the underlying asset at a particular price on or before determined future date. A very important component in the pricing of all options is the volatility of the underlying asset. To balance the market, central marketplaces were established where farmers could sell their commodities for immediate delivery (spot contract) or forward delivery (forward or future contract). Both futures options trading is understood as derivative trading, since the price of both instruments derives its value from its underlying asset, which is most of the time a commodity in case of futures, and stock or index in case of options. Today you can trade futures not only on agricultural commodities, but also financial instruments like bonds, currencies and securities. If for example car sellers just went out with big selloff of their new models (same car, new model) with very attractive prices and paying possibilities and you suddenly can get a new car, new model for the same price as you can get the old car, old model from your neighbor, you will probably step away from the contract with your neighbor and not exercise the option you had.
Because of this fact the prices of old cares of the same model has grown significantly on the market and you will be more than happy to exercise the option you have to buy this car for 'only' $20,000, while the normal price is currently around $25,000.
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