What Are Options on Futures & How Do They Work? (2024)

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What Are Options on Futures & How Do They Work? (2024)

FAQs

What Are Options on Futures & How Do They Work? ›

An option on a futures contract gives the holder the right, but not the obligation, to buy or sell a specific futures contract at a strike price on or before the option's expiration date. These work similarly to stock options, but differ in that the underlying security is a futures contract.

What is an example of a future option? ›

Now that we have explored the meaning of futures and options, let's illustrate with a future and option trading example: Two traders agree on a ₹150 per bushel price for a corn futures contract. If the corn price rises to ₹200, the buyer gains ₹50 per bushel, while the seller misses out on a better opportunity.

Which is better futures or options? ›

Futures have several advantages over options in the sense that they are often easier to understand and value, have greater margin use, and are often more liquid. Still, futures are themselves more complex than the underlying assets that they track. Be sure to understand all risks involved before trading futures.

What is the difference between options and futures for dummies? ›

An option gives the buyer the right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the contract. A futures contract obligates the buyer to purchase a specific asset, and the seller to sell and deliver that asset, at a specific future date.

How do you make money trading futures options? ›

Here are seven tips for how to proceed.
  1. Establish a trade plan. The first tip simply can't be emphasized enough: Plan your trades carefully before you establish a position. ...
  2. Protect your positions. ...
  3. Narrow your focus, but not too much. ...
  4. Pace your trading. ...
  5. Think long—and short. ...
  6. Learn from margin calls. ...
  7. Be patient.

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