Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

Futures and Options Contract Explained

1 min read

The key to understanding options futures is what they are and how the work. By looking at the dynamics these futures contracts you will have a better understanding of the characteristics of options futures and in turn, have additional tools that you need in order to be a successful trader.

What Is An Options Futures Contract?

The best definition of an options futures contract is a form of trading commodities between buyers and sellers where an asset is sold at a mutually agreeable price and to be executed by a specific date. They are called options futures because it concerns a transaction that will take place in the future at the discretion of the buy. The buyer is simply purchasing the right to make the transaction; if he or she chooses not to complete the deal, it becomes null and void on the expiration date.

Options Contracts

There are two different types of options contracts; call options and put options; in options futures, a put option gives its buyer the right to sell the underlying asset while a call option gives the buyer the right to purchase the underlying asset.

For example, you decide to buy a call option on corn futures; you are going to buy 1,000 bushels on the 25th of June for a strike price of $5.50 per bushel and the current price is $6.00 per bushel. What you now have is an agreement to buy, if you choose, the corn on the above date for the listed price. If at any time up to the 25th the price of corn is above $5.50, you can sell your 1,000 bushels and take the profit, if you so choose.

Possible Scenarios

The date on the contract is the 25th of June; this is known as the expiration date. At this point in the options trading, the buyer must decide by this date if he or she wants to complete the transaction as outlined in the contract or walk away from the deal.

Suppose that on the expiration date of your options futures contract, (the 25th), the option value is $6.00 per bushel. You are able to buy the corn for $5.50 and resell it for $6.00, making a profit of $500. (1,000 bushels at a profit of $0.50 each)

Conversely, if the expiration date arrives and the price of your corn is only at $5.00 per bushel, you could simply walk away from the deal and let it expire. Remember when commodities trading, the buyer has only paid for the right to purchase the underlying asset of the options futures; he or she does not have to do so. If you allow this contract to expire, you will only lose the premium that you paid when you made the contract; this money will be paid to the seller as his or her profit.

There are actually other investment strategies that can be implemented by either buyers or sellers in order to improve their position. For sellers, these techniques usually include stop loss orders because a seller can be vulnerable if prices rise drastically. No matter what the position, options futures have a wide variety of market orders to select.

 

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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