Options Basics

Options Basics

Options on futures present traders with a variety of flexible, economical trading strategies. Traders can use options alone, or in combination with futures contracts, for strategies that cover virtually any risk profile, time horizon, or cost consideration.

Options on futures provide:

• The ability to hedge cash and futures positions against an adverse price direction without giving up the benefits of favorable price movements.
• The availability of hedging protection at many different levels of cost and degrees of protection.
• A means for businesses and investors to act aggressively or conservatively on views about the direction and volatility of prices for the various futures markets.

Because the underlying instrument of an options contract is a futures contract for a specific commodity, market participants can use options to cover themselves against volatile swings in futures prices, just as futures can be used to protect against volatile moves in the prices of the underlying physical commodities.

Each options contract specifies:

• The right to buy or sell a futures contract
• The commodity and contract month of the futures contract
• The price at which the futures contract will be bought or sold
• The expiration date of the option