"So much of the trading game is psychological. It is very common for every previous gain or loss to influence perspective, thereby affecting future trades. Traders must always be aware of this in order to filter the positive from the negative. Continued objectivity is the goal."
– Andy Bulawa
Futures & Options Broker
1. Long Futures
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Scenario:
This trader feels that Live Cattle futures are poised for a rally. The implied volatility of the options is relatively high, but the trader does not expect it to come down soon. Therefore, he decides to buy one futures contract.
Specifics:
| Underlying Futures Contract: | April Live Cattle |
| Futures Price Level: | 73.00 |
| Days to Futures Expiration: | 75 |
| Days to Options Expiration: | 55 |
| Option Implied Volatility: | 16.2% |
| Position: | Long 1 Futures |
At Expiration:
| Breakeven: | 73.00 (original futures price) |
| Loss Risk: | Unlimited; losses increase as futures fall. |
| Potential Gain: | Unlimited; profits increase as futures rise. |
Things to Watch:
Changes in implied volatility have no effect on this position. If the trader has an opinion on volatility, he may consider another strategy. Another strategy may increase potential profits and/or reduce potential losses. Check the next page for suggested follow-up strategies.
Follow-up Trading Strategies
MENU - Futures Strategy Guide
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