Futures Options

We prefer to trade options as a spread.  When trading as a spread,  multiple options of different strike prices and/or maturities are simultaneously bought and/or sold.  Before you learn about option spreads and how they can be effective, it is important to know some basics about options.

Option Facts

1. When you purchase or go long an option, the most you can lose is the amount you pay for the option, and therefore, your risk is limited.
2. When you buy an option, it is a cash purchase.  There is very low, or even no margin requirement.
3. When you write or sell an option, you have unlimited risk. Your risk is as risky as being long or short a futures contract.
4. When you write or sell an option, you are required to post a margin requirement.
5. The maximum profit you can earn when you write or sell an option is the amount of the premium received.

Option Hints and Observations

1. An option loses its time value and the time value loss accelerates most during the last 30 days before expiration.
2. More than 80% of options expire worthless or severely devalued.
3. Lower underlying futures volatility typically results in lower option premiums and the options may be considered potentially undervalued.
4. Higher underlying futures volatility typically results in higher option premiums and the options may be considered potentially overvalued.
5. In most cases, options are inherently less liquid than the underlying futures related to the options.