Options on Futures
Candlefocus EditorOptions on futures are best suited for traders who have a good understanding of the futures market and are looking for a way to use leverage (buying with less capital) and improve the risk/reward of their position. It is important for traders to understand the details of both the option contract and the underlying futures contract.
The main components of the options on futures contract are the underlying contract, the strike price, the call/put option and the expiration date. The underlying contract is the futures contract between two parties to buy/sell a certain amount of an asset at a specific price and date in the future. The strike price is the predetermined price at which the futures contract will be bought/sold, while the call/put option indicates whether the option holder had the right to buy the future (call) or sell the future (put). The expiration date is when the contract term ends and the holder can decide to exercise the option. Traders will cash settle the transactions at the closing price of the contract on the expiration date.
Options on futures have several advantages for traders. They often have relatively low minimum deposits and much higher leverage than regular futures trading, meaning a trader can expose himself to a larger market with a smaller account.
The key information traders need to know when trading options on futures is the risk and reward of the transaction. They will need to do their research on the underlying futures contract, the settlement price and the expiration date. For traders who are willing to research these components, options on futures can offer significant gains for relatively small investments.