Watch this RJOF Quick Tips: Introduction to Options video presented by our Senior Market Strategist, Mike Sabo to learn what options on futures are, options trading and how to implement it in your futures trading plan.
Why Options Trading on Futures?
Options are a great way to fine-tune your trading approach beyond simply “buy if it’s going up” and “sell if it’s going down.” Many traders like the defined-risk aspect of options trading, for example. But, it doesn’t mean options are entirely without risk. You have to get direction, time frame, and amount of move right in order to profit.
What are Options on Futures?
There are two types of options. Calls give the buyer the right but not the obligation to buy a futures contract at a certain price prior to option expiration. Puts give the buyer the right but not the obligation to sell the underlying futures market at a certain price prior to option expiration.
Buying vs. Selling Options on Futures
Most individual traders tend to buy options because they know their maximum risk (premium paid) upfront. But, selling options can give you opportunities to profit because you collect and keep the premium the buyer pays if the option expires worthless or decreases in value. However, there is potentially unlimited risk in selling options.