A futures option, or option on futures, is an option contract in which the underlying is a single futures contract. The buyer of a futures option contract has the right but not the obligation to assume a particular futures position at a specified price the strike price any time before the option expires.

The futures option seller must assume the opposite futures position when the buyer exercises this right. If you are unfamiliar with futures, it is recommended that you learn more about trading futures contracts before continuing with the rest of this article. Futures options usually expire near the end of the month that precedes the delivery month of the underlying futures contract i.

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March option expires in February and very often, it is on a Friday. This is the price at which the futures position will be opened in the trading accounts of both the buyer and the seller if the futures option is exercised. When a futures option is exercised, a futures position is opened at the predetermined strike price in both the buyer and the seller's account.

Depending on whether a call or a put is exercised, the option buyer and seller will assume either a long position or a short position. It is important to remember that the underlying of a futures options is the futures contract, not the commodity. Hence, the option price move along with the futures price and not the commodity price.

Although the futures price tracks the commodity price closely, they are not the same. For highly leveraged products like options, the impact of such tiny differences can be greatly magnified. Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable.

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For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time Cash dividends issued by stocks have big impact on their option prices.

This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement.

In place of holding the underlying stock in the covered call strategy, the alternative Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions.

They are known as "the greeks" Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose.

Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience.

Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service.

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Futures positions assumed upon option exercise Buyer Assumes Seller Assumes Call Option Long Futures Position Short Futures Position Put Option Short Futures Position Long Futures Position.

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The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose.