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The Top 3 Advantages of Trading Futures Options

March 30, 2021 by Daniels Trading| Futures 101

Options on futures, or “futures options,” offer market participants an unparalleled collection of opportunities. However, their name often confuses and discourages many active traders from entering the market. In this blog article, we’ll take a look at the basics of options on futures and three key advantages of making them part of your trading plan.

1. Simplicity

Futures options are options contracts that use futures contracts as underlying assets. Confused? Don’t be―these products function the same as traditional options contracts. Here is a quick look at the basics of futures on options:

  • Strike price: Strike price is the building block of any options contract. It is a set price where the contract may be exercised.
  • Calls and puts: There are two types of contracts: calls and puts. A call gives you the right to go long a market from a predetermined strike price. A put gives you the right to short a market from a predetermined strike price.
  • Buying and selling: Options on futures contracts may be bought or sold. When a trader buys a contract, a premium is paid; when a trader sells a contract, a premium is received. If you buy a contract, your risk is limited to the premium paid; if you sell a contract, your risk is unlimited because you guarantee execution no matter what.

We’ve been assisting our clients in making sound trading decisions for over 25  years.  Trust a Daniels Trading broker to help you reach your trading objectives in  any market.

If you’ve ever traded traditional stock or commodity options, then learning the ins and outs of futures options should be routine. Like stocks or commodities, each product has an options chain that defines the contract’s premiums. A premium’s value depends upon whether a contract’s strike price is at the money (ATM), in the money (ITM), or out of the money (OTM). ATM and ITM contracts are assigned higher premiums than OTM contracts―simple as that.

2. Direct Market Exposure

At its core, a futures options contract’s functionality is exactly as its title dictates. It is an options contract that is based on a futures product. Accordingly, you can take long or short positions in a market by buying calls or puts.

As an example, let’s say that you are skittish about the market and think that gold has solid upside potential over the coming six months. It is early June, and CME December gold (GCZ) is trading at $1,750.00; given the emergence of new COVID-19 variants, you think that $2,000.00 by the late fall is a real possibility.

To go long gold using options on futures, all you have to do is buy a call contract at a desirable strike price. If you think that the current market price ($1,750.00) is an intermediate-term floor, then purchasing ITM, ATM, or OTM GCZ calls opens a new long position.

The beauty of this trade is that the only money risked is the cost of the premium. If you’re completely wrong and the price falls to $1,000, you only lose the premium. Conversely, if you were long one futures contract from $1,750.00 and price fell to $1,000.00, the result would be catastrophic (every $1.00 is worth $100, -$75,000).

3. Flexibility at Expiration

It is important to remember that all derivatives products have a finite shelf life. For futures and options, this comes in the form of an official expiration date. Upon expiry, a contract is taken off the board and becomes untradable.

For options on futures, the option contract typically expires one month before the underlying futures contract. This can be a good or bad thing for an open position because an option’s premium value is subject to time decay (delta). Although this relationship may seem confusing, it actually gives the trader several alternatives. Let’s say that you made your futures options play in June and bought one GCZ call with an $1,800 strike at a premium of $4,000. It is now mid-October, and GCZ has rallied to $1,875 (great call!). Here are your alternatives:

  1. Close out the position by selling one $1,800 GCZ call. It is now an ITM contract, with an expensive premium of $5,500. Your profit will be $1,500 ($5,500-$4,000).
  2. Exercise the option. By exercising the option, you assume a long position for one GCZ contract from $1,800. Your initial gain will be $3,500 ($75*100 = $7,500 – $4,000); however, this position’s value will fluctuate as GCZ pricing moves up and down.

Are You Ready to Trade Futures Options?

Sometimes the best way to learn about a subject is by talking to a true expert. For more information on how futures options can work for you, schedule a free one-on-one consultation with a Daniels Trading broker today.

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Filed Under: Futures 101

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

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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