Futures Option Trading -  
An Overview of Futures and Futures Option Trading

Futures Option Trading

Futures options are available for many types of futures contract and is becoming more widely accepted and popular over the years.

In a futures option, the futures contract is the underlying asset. A futures contract is essentially an obligation to transact (buy or sell) the underlying (can be a commodity or a financial instrument such as Treasury Bonds and Notes) at a specified price and date.

Some of the actively traded futures options are Eurodollar futures, Treasury bonds, crude oil, soy bean and corn. The prices of futures are based on the anticipated outlook or performance of the underlying at a future date.

Similar to the options available to the stock market, the two basic types of futures options are the call and the put options. A trader with bullish outlook will purchase the call option. If his outlook is bearish, he will instead purchase the put option. Both of these trades place him in a position with limited risk, and unlimited profit potential, which the trader has to pay a premium to have the privilege.

Taking delivery of a futures option trade: When the buyer of a in-the-money futures call option exercise, he will receive from the seller the cash profit and a long position in the underlying futures contract. Similarly, the holder of an in-the-money put option will receive from the seller the amount of cash due to him plus a short position in the futures contract.

Futures and futures option trading can be either technical or fundamental or a combination of both. Having in-depth knowledge of the fundamentals of the market traded is one of the many key success factors in futures and futures options trading.

There is yet good news for the traders that are more incline towards technical analysis given the advent of the internet, which provide access to up-to-the second quotes and charts via online platform.

Futures and futures option trading are highly leveraged and volatile, proper risk management and stop-loss strategies must be in place to preserve and protect your precious trading capital to stay in the game, and with more experience gain, build your profit over time.

Remember, there are only old and wise soldiers.

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