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Turning $9,333.62 into $24,558.62 Trading ES Options
Measure content performance. Develop and improve products. List of Partners vendors. Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying or writing call or put options depending on the direction you believe an underlying product will move.
Buying options provides a way to profit from the movement of futures contracts, but at a fraction of the cost of buying the actual future. Buy a call if you expect the value of a future to increase. Buy a put if you expect the value of a future to fall. The cost of buying the option is the premium.
Weekly Mini S&P option contracts
Traders also write options. Many futures contracts have options attached to them.
Gold options, for example, are based on the price of gold futures called the underlying , both cleared through the Chicago Mercantile Exchange CME Group. The premium and what the option controls vary by the option, but an option position almost always costs less than an equivalent futures position. Buy a call option if you believe the price the underlying will increase. If the underlying increases in price before the option expires, the value of your option will rise. If the value doesn't increase, you lose the premium paid for the option. Buy a put option if you believe of the underlying will decrease.
Trading Options on Futures Contracts
If the underlying drops in value before your option expires, your option will increase in value. If the underlying doesn't drop, you lose the premium paid for the option. Option prices are also based on ' Greeks ,' variables that affect the price of the option. Greeks are a set of risk measures that indicate how exposed an option is to time-value decay. Options are bought and sold before expiration to lock in a profit or reduce a loss to less than the premium paid.
When someone buys an option, someone else had to write that option. The writer of the option, who can be anyone, receives the premium from the buyer up front income but is then liable to cover the gains attained by the buyer of that option. The option writer's profit is limited to the premium received, but liability is large since the buyer of the option is expecting the option to increase in value. Therefore, option writers typically own the underlying futures contracts they write options on. This hedges the potential loss of writing the option, and the writer pockets the premium.
This process is called "covered call writing" and is a way for a trader to generate trading income using options, on futures she already has in her portfolio.
A written option can be closed out at any time, to lock in a portion of the premium or limit a loss. To trade options you need a margin approved brokerage account with access to options and futures trading. You can also find quotes in the trading platform provided by options brokers. Buying options on futures may have certain advantages over buying regular futures. The option writer receives the premium upfront but is liable for the buyer's gains; because of this, option writers usually own the underlying futures contract to hedge this risk. CME Group.
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