Trading futures options is an excellent way to venture into the futures markets. There is generally less risk and volatility when using options instead of futures. In fact, many professional traders only trade options.

However, before one starts to trade options, it is important to have a basic understanding on options.

What are Options?

An option contract gives the buyer the right, but not the obligation, to buy or sell an underlying futures contract at a specified strike price on or before a predetermined future date. Option buyers pay an upfront premium for this right. There are mainly two types of options: call option and put option.

Call Option: A call option gives the buyer the right to buy the underlying at a specified strike price on a future date. For example, if you believe that Gold futures is going to trade higher, you would buy a call option.

Put Option:
A put option gives the buyer the right to sell the underlying at a specified strike price on a future date. For example, if you expect the Hang Seng Index futures to move lower, you would buy a put option.

Strike Price:
This is the price which you have set to buy or sell the underlying futures contract. For example, a May HSI call option at the strike price of 13800, will allow you to buy a May HSI futures at 13800 upon expiration. Most traders do not convert the option, but rather, they will close out the option position and collect the profits.

Time to Expiration:
The expiration date is the date the option contract cease to exist. When you buy an option, you cannot hold it forever. For example, a December Corn option expires in late November, you will need to close out your option position before the expiration. Generally, the more time an option has to expiration, the more expensive (in terms of time value) it will be.

Option Trading Strategies:
An option strategy involves the simultaneous buying and/or selling of different options contracts. Options strategies can favour movements in the underlying futures that are bullish, bearish and even neutral. People who are neutral on the underlying movements of the market may also play on the bullishness or bearishness of the volatility. These option positions can be long or short positions in calls or puts at different strike prices.

Note: List is NOT exhaustive

What Options Products are available for trading?