Futures and Options

Futures and Options trading secrets that can boost your trading performance – we’ll disclose the best trading systems and strategies for trading futures and options.

Let’s clear up the most often asked question about futures and options and that is – what is the difference between the two? Have a little patience here and I’ll do my best to explain, okay? Please don’t shoot the messenger though.

  • More Complicated Than Other Investments

Both futures and options trading is more complicated than straight-forward investment methods like stock trading. You can sound like you know more than you do by calling them F & O’s. You will need to educate yourself more thoroughly if you want to enjoy the success that is certainly available in the futures and options trading market. Both types of contracts are relatively short-term (less than a year) so you are not tied up in any really long-term position.

Strategies and Systems for Trading Futures and Options

  • What is the Difference Between Futures and Options

While the contracts that the instruments trade on (the derivatives) are similar in that they both deal in a specific quantity and a specific price and a predetermined date in the future of the expiration of that contract, the basic difference between futures and options is this:

A futures contract “obligates” the owner to buy or sell a specific quantity of the underlying asset at a specific price on a specific date. However, an option contract gives the “right,” but not the “obligation,” to the owner to buy or sell a specified quantity of the underlying asset at a particular price by a specified date in the future. So there is a difference with futures and options.

Trading futures and options includes speculation on future prices of stocks, commodities, currencies, indices, etc; but remember, that options give you the “right” to follow through, but not the “obligation,” and futures trading mandates an “obligation” to buy or sell the underlying assets at the predetermined date. One major rule to always remember when trading futures is to close your position prior to expiration of the contract, or you could find yourself in trouble.

Learn Before You Earn – Great Advice for Futures and Options Trading

  • Object of Trading Futures and Options

As in all futures and options trading, the object is to buy in at a lower price than you close at, and the reverse for the seller. The buyer of an option or futures contract is planning on the underlying asset going higher in value before the date of expiration of the contract; thereby making a profit on his futures and options transaction when he closes or sells his position.

The seller of an option (also called the writer and not to be confused with futures and options) is planning on the value of the underlying asset declining in value before the date of expiration of the contract; once again, thereby making a profit on his transaction. The representative asset is now worth less than he sold it for, so he keeps the profit.

Of course, it can all reverse on you and you will suffer a loss, but I am choosing to remain positive here.

  • More Explanation of Futures Contracts

Now when you trade in futures and options, or specifically in futures, both the buyer and the seller of the contract is obligated (does not have a choice) to fulfill that part of the agreement. If you bought a futures contract, you hoped to be able to sell it before the date of expiration for an amount more than you paid. Of course, most typical traders (speculators) don’t want to actually have to buy the underlying asset, but gain the profit when they sell it to someone else who may want to actually buy that underlying asset at a price lower than it is currently trading for. In that event, the owner gets to keep the profit; he sold it at closing for more than he paid for it.

The seller of futures contracts believe the underlying asset will decline in value, and once again, they will close their position before expiration and keep the profits.

By closing your trade in the opposite direction of your position prior to expiration, you don’t have to actually take possession of or make delivery of whatever the contract was for, regardless if it was futures and options. If it’s a commodity, like, let’s say bananas; unless you are zoo keeper, what are you going to do with all those bananas?

  • More Explanation of Options Contracts

Now, let’s make another jump. If I would love to buy 100 shares of Carla’s Creamy Cookies (CCC) but at $50/share, I just don’t have that kind of trading account. So, I bought 1 option of CCC (which represents 100 shares of CCC) with a strike price of $55 and an expiration date 2 months in the future. During that 2 month period, the future King of Texizonafornia fell in love with Carla’s Cookies and proclaimed to the land that they were the best cookies of all. Then probably CCC would climb in price substantially; let’s say to $70/share. Because I bought an option that gives me the right to buy CCC at $55 and I recognize the great opportunity that had just befallen me, I would most likely buy 100 shares of CCC at $55/share, instead of selling my option. I was able to buy 100 shares of a $70 stock for $55 – how do you like them apples?

This gives you a general explanation of the difference and that trading both futures and options have their place in your investment portfolio. Automated trading is a great way to play the futures and options game, but that’s for another article.

Here are a couple of great tutorials that will explain more fully the fundamental of futures and options trading.

“The desire to win is useless without the will to prepare.” — Gordon Wood

The argument over which you should trade – futures or options, will certainly never be settled here. So, do you homework, study and learn – watch what the pros are doing. That is your key to success. There are great profits available to the astute investor who is willing to put forth the time and energy necessary to become a successful futures and options trader.

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