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Option Strategies for Futures Traders: #1 Option Tree

August 17, 2012 by Jonathan Williams| Tips & Strategies

There are various exotic option strategies with different objectives and theoretical scenarios. I’m going to walk you through the basics in detail, while keeping these complex instruments as simple as possible! In addition, over the next few weeks, we will cover a few prime options strategies for futures traders that benefit from the leverage and volatility inherent to our markets.

Let’s start with an option tree, or otherwise known as “Christmas Tree”. It is called a tree because when drawn structurally, this three-legged option play will form a triangle. Options are risky no matter what strategy you employ, and this option tree has unlimited risk potential. A trader should carefully consider if this strategy is suitable for their risk tolerance.

Learn 21 futures and options trading strategies in this complimentary,  easy-to-read guide. Download Now >>

The Plan: We would purchase an option, and sell two other options at successively higher strike prices.

Example: Call option tree on September Gold futures contract.

Buying the 1615 call or Buy a put
Selling the 1625 call or Sell a put
Selling the 1635 call or Sell a put

Maximum Loss: If held to expiration, the loss starts at 1645 +/- premium collected/paid.

Maximum Gain: The profit from the bull spread +/- the premium collected.

Option Tree

All the legs must either be calls (Call tree) or puts (Put tree).

When to use it: A trader would use this strategy when he/she thought the underlying —in this case gold— was going to make a move higher, but not as high as the second short option position. Conversely, a trader could use a Put option tree if he/she thought the market was headed lower. This uncovered short option presents unlimited risk to the trader if left unmanaged and could cause serious damage to the trader.

The Goal: The ultimate purpose of using this strategy is to use the premium of short options to finance the purchase of the call option as well as collect the premium at expiration. We want two things to happen:

  1. Finance the purchase of the call option
  2. Collect the option premium at expiration

Things to consider:

  • A plan to exit this trade if the market turns against you.
  • Time until expiration – specifically because of the short option leg.
  • Theta – the time decay associated with an option. It signifies how much intrinsic value is whittled away as time passes.
  • Delta of the option position – Delta is the percentage move of the option in correlation to the futures contract.
  • Risk tolerance.

In my opinion, options are great tools to utilize in trading the futures markets. Options are flexible but complex instruments that involve complex mathematics and theoretical scenarios that one should understand before trading in a live environment. If you have any questions or want to begin using such strategies, I recommend you download the guide below and contact your Daniels Trading Broker.

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Filed Under: Tips & Strategies

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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