Introduction To Futures And Options Markets - Picking Commodity Options Markets Making Price Moves

Nov. 21, 2010 - PRLog -- Introduction To Futures And Options Markets

1. Commodity Option Trading Introduction

What Are Commodity Options?

An option is a contract that gives you the right, but not the obligation, to either go long or go short the underlying futures contract at a pre-determined entry price on or before a specific date. It lets you take advantage of price moves in the futures markets without actually having a futures position.

There are two types of options, Call options and Put options.

The Call option gives you the right, but not the obligation, to go long the underlying commodity futures contract at a pre-specified entry price on or before a specific date. You would buy a Call option when you believe the futures price will increase.

A Put option gives you the right, but not the obligation, to go short the underlying commodity futures contract at a pre-specified entry price on or before a specific date. A Put option is used when you believe the futures price will decrease.

Commodity Option characteristics


   Buying commodity Options have several characteristics which make them more attractive to traders. They include:

       * Limited Risk. You cannot lose more than the amount paid for the option.
       * Staying Power. You don't run the risk of getting stopped out of a trade.
       * Profit Is Not Limited. If correct in your analysis, profit potential is not limited.
       * Quick Fills. You can quickly enter and exit markets at a reasonable price.
       * No Margin Calls. You won't encounter a margin call on option positions.
       * No Limit Moves. Options are immune from the risk of limit moves.
       * Numerous Strike Price Selections. Options are available in a range of strike prices.
       * Lower Capital Requirements. Buying an option is less than the futures margin cost.
       * * Provide Trading Alternatives. Options can be used as a substitute for protective stop. Get Internet #1 - Introduction To Futures And Options Markets @ http://tradingcure01.webs.com  and be Successful forever!


2. Common Options Basic Terms

The following terms are commonly used in option trading.

The "strike price" is the price that you may enter the underlying futures contract if you exercise the option. For Call options, the strike price is the entry price that has the right to go long the underlying commodity futures contract. For Put options, this is the entry price at which one has the right to go short the commodity.

The "option premium" is market-determined price of the option that you pay to purchase either a call option or a put option. It is a non-refundable cost that the option seller keeps, and is your maximum amount of risk in the market. The premium is quoted just like the price of the underlying futures contract; in cents, points, etc. Option premiums fluctuate daily due to market conditions.

Options have two separate components which together define the option's premium. They are time value and intrinsic value.

"Time value" is the amount of time remaining before the option expires. "Intrinsic value" refers to how much the price of the underlying futures price is, relative to the strike price of the option. The option will have intrinsic value when the price of the futures contract is higher than the strike price of a call, or when the price of the futures contract is lower than the strike price of a put. Options with intrinsic value are referred to as in-the-money options.

All options are assigned an "expiration date" after which they are no longer valid for trading purposes. This is the last day that the option may be exercised. Frequently, this date will be 2-4 weeks before the underlying futures contract's Last Trading Day (LTD), although some futures items synchronize the option expiration date with the futures contract LTD. The farther out into the future an option's expiration date is, the more expensive the option will be (time = money). Get Internet #1 - Introduction To Futures And Options Markets @ http://tradingcure01.webs.com  and be Successful forever!

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