The buyer of a put option will make money if the futures price falls below the strike price. The seller of a call option loses money if the futures price falls below the strike price.
If the futures price rises above the strike price, the option buyer will not exercise the option because exercising will create a loss for the buyer.
The intrinsic value is the amount of gain that can be realized if the option is exercised and the resulting futures position closed out. Extrinsic (extra) value is the amount by which the option premium exceeds the intrinsic (exercise) value.
Market volatility - As the futures market becomes more volatile, the extrinsic value increases.
Below are examples of call and put options that are in-the-money, at-the-money, and out-of-the-money. Below are actual examples of soybean option premiums for various strike prices and delivery months. The options with strike prices at-the-money and out of-the-money have premiums containing no intrinsic value (exercise value.) Only those options that are in-the-money have premiums with intrinsic value.
This occurs because the August option will be traded for a longer period of time than the July option. An option trader who is writing a call option for $6.50 will be liable for exercise value if the futures price increases by only one cent. Continuing further from the previous article Short Put Option Trading Strategy, we cover an example for calculating profit and loss from short put option trading. Your profit will be to the maximum value of the money you received from the sale of put option i.e. Your maximum loss will be when the option is exercised by the buyer with the maximum difference between strike price and the underlying.
However, you earlier received $5 from the sale of put option, hence taking that into consideration, your maximum loss is at $25.
When you short an option, you implicitly benefit from Options Time Decay that works in your favour (see Options Time Decay: Time Decay in Options Explained with Example). Although short put position is said to be limited profit limited loss position, the fact is that the limited profit potential you have is very small compared to the limited loss potential which can go very large.
Imagine what will be the result if you short a $100 strike put for $5 option premium and the stock price goes down to $50.
Another thing is that short positions require a lot of margin money to be kept with the futures and options brokers. Hence an option trader must consider all these risks before diving into a short option position.
Top 3 Futures Trade Set-Ups For Summer 2015 Presented by The Cullen OutlookLet’s take a look at what others may have missed going into the third quarter.
The topic of Futures and Options has come up quite frequently in comments and emails but I’ve never done a post on them till now because the posts got too long. There are two types of Derivatives commonly traded in the market – Futures and Options, and within Options there is further a Call option and a Put option.
So, that means the price of Infosys futures or Infosys options will depend on the price of the Infosys shares. But you can sell a future, call option or buy a put option to take a short position in the stock or index.
I also traded in currency future in MCX-SX but wild depreciation of rupee gave me loss(i shorted) few month back.
I think you are true saying that commodity future market is better in trading point of view,as prices have a great support around the production value and is a good buying opportunity if anyone takes informed decisions about it…Of course sometimes these levels are not honored as what happened in 2008.
Risk DisclosureWHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED. Comprehensive Grain & Oilseed Futures Kit!Whether you are new to the agricultural commodities industry or a seasoned trader, it is important to have a solid understanding of the markets to assist you and your trading strategies. Whether you are small cap investor or an active option trader, NiftyDirect brings to you what you need!
In this situation the option buyer will let the option expire worthless on the expiration day. In this situation, the option buyer will let the option expire worthless on the expiration day. The option buyer pays the premium to the option writer (seller) at the time of the option transaction. A call option has intrinsic (exercise) value if the futures price is above the strike price. Extrinsic value is the return that option writers (sellers) demand in return for bearing the risk of loss from an adverse price movement.
These option terms pertain to the relationship between the current futures price and the strike price. In other words, a call option is in-the-money if the current futures price is above the strike price because it can be exercised at the strike price and sold at the current futures price for a gain. A one cent change in the future price will put the option either in-the-money or out-of-the-money. The time period from March 1 to mid July, when the August option expires, is four and one-half months. It is only 14 cents for the 50 cents out of-the-money option ($7 strike price option) and 8 cents for the 50 cents in-the-money option ($6 strike price option).
However, by writing a $7 option, the futures price will have to rise by over 50 cents before the writer will be liable for exercise value. Hence while trading on a single Short Put Option Position, it's always better to have a target and stop loss in mind and get out of that position when that target is achieved or stop loss is hit. Sell out-of-the-money (lower strike) options if you are only somewhat convinced, sell at-the-money options if you are very confident the market will stagnate or rise.
The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. Here is the first part with some very basic and easily digestible information on futures and options. Options and Futures give you a lot of leverage and you can make (or blow up) a large amount of money in a short period of time with the same amount of capital than you can with a regular cash position.
In general, the more out-of-the-money (lower strike) the put option strike price, the more bearish the strategy. If held to expiration, the futures would have to fall more than 10% by expiration just to break even. Through our comprehensive futures kit, you will gain a complete overview of the grain & oilseed markets! The option seller (writer) must take the opposite side of the option buyer’s futures position. For example, if you choose a soybean option with a strike price of $7 per bushel, upon exercising the option you will buy or sell futures for $7. For example, corn options have December, March, May, July, and September delivery months, the same as corn futures.
The amount of gain or loss from the transaction depends on the premium you paid when you purchased the option and the premium you received when you sold the option, less the transaction cost.
The amount of gain or loss from the transaction depends on the premium you received when you sold the option and the premium you paid when you repurchased the option, less the transaction cost.
The seller (writer) of the call option must sell futures (take the opposite side of the futures transaction) if the buyer exercises the option. The only money transfer will be the premium the option buyer originally paid to the writer. The writer (seller) of the put option must buy futures (take the opposite side of the futures transaction) if the buyer exercises the option. The only money transfer will be the premium the option buyer originally paid to the seller. A put option has intrinsic (exercise) value if the future price is below the strike price. Conversely, a put option is out-of-the-money if the current futures price is above the strike price. Futures price would have to rise by over 50 cents before the option would contain any exercise value. The time period from March 1 to mid June for the July option is only three and one-half months. So the extrinsic value decreases as the option moves further out-of-the-money or in-the-money. So the writer will demand a higher return (extrinsic value) for writing an at-the-money option. The date on which the option quotes were taken (March 1) and the futures prices ($6.50) are also the same. If you doubt market will stagnate and are more bullish, sell in-the-money options for maximum profit.
Check the follow-up strategies if the futures fall or volatility rises to the levels expected before expiration.
For example, if you buy an option with the right to buy futures, the option seller (writer) must sell futures to you if you exercise the option. Option contracts are traded in a similar manner as their underlying futures contracts. However, you run the risk of having the option exercised by the buyer before you offset it. Because of extrinsic value, an option buyer can sell an option for as much or more than its exercise value. If this option is exercised, the option buyer will own a futures contract purchased at a strike price of $6. The option writer (seller) takes the opposite side (sell) of the futures position at the strike price. The premium is the maximum amount the option buyer can lose and the maximum amount the option seller can make.
This occurs because exercising a put option places the option buyer in the futures markets selling (rather than buying) futures at the strike price.
Because of market volatility, option writers demand a higher return to compensate them for the greater risk of loss due to a rapidly changing market.
The $6.00 strike price option has extrinsic value of 8 cents, the difference between the premium and the exercise value.
The futures position can then be offset by buying a futures contract at the lower price for a gain.
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