5. Long Call
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Scenario:
A trader projects that stock market futures are poised for a large upward move in a short period of time. An increase in the underlying futures to 1315.00 or greater, and an increase in implied volatility by 4 percentage points, also seem likely. Consequently, the trader decides to buy a call.
Specifics:
| Underlying Futures Contract: | December S&P 500 | |
| Futures Price Level: | 900 | |
| Days to Futures Expiration: | 45 | |
| Days to Options Expiration: | 45 | |
| Option Implied Volatility: | 18.1% | |
| Option Position: | Long 1 Dec 905 Call | - 5.40 ($1350) |
At Expiration:
| Breakeven: | 910.40 (905 strike + 5.40 premium) | |
| Loss Risk: | Below 910.40; with maximum loss, at 905 or below, of 5.40. | |
| Potential Gain: | Unlimited; profits continue to increase as futures rise above 910.40. | |
Things to Watch:
The trader will lose the volatility effect if this position is held to expiration. As soon as implied volatility rises to the expected level the trader may consider liquidating or transforming this position. Check the next page for appropriate follow-up strategies.
Follow-up Trading Strategies
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Options Risk Disclosure: An option on a commodity futures contract is a right, purchased for a certain price, to either buy or sell a commodity futures contract during a certain period of time for a fixed price. Although successful commodity options trading requires many of the same skills as does successful commodity futures trading, the risks involved are somewhat different. For example, if a customer buys an option (either to sell or purchase a futures contract or commodity), the customer will pay a “premium” representing the market value of the option. Unless the price of the futures contract underlying the options changes and it becomes profitable to exercise or offset the option before it expires, the customer’s account may lose the entire amount of such premium (together with the costs of commissions and fees incurred to purchase such options). Conversely, if a customer sells an option (either to sell or purchase a futures contract or commodity), the customer will be credited with the premium but will have to deposit margin due to its contingent liability to take or deliver the futures contract underlying the option in the event the option is exercised. The writer of the option is however at unlimited risk with respect to the call option written, and risk on the put option of the amount should the price of the futures contract drop to zero. Sellers of options are subject to the loss which occurs in the underlying futures position (less any premium received). The ability to trade in or exercise options may be restricted in the event that such trading on U.S. commodity exchanges is restricted by both the CFTC and such exchanges, and it has been at certain times in the past.
