When people talk of future option or commodity option trading, they think of the risks involved. There are risks involved when buying and selling options. When you buy an option that the risk is how much you paid for options. There is limited risk in buying an option. In selling futures options is unlimited risk, because if the option goes "in the money" you have the possibility of unlimited loss.
For example, the underlying futures market if traded at 3.00 and we sold a 3.50 call option, this option is not yet money. It is "out of the money". If futures hits 3.50, so the option is "on money". When it goes beyond 3.50, its money. If we sold the product option and futures contracts ultimately go to 5.50, so it has 2.00 worth "real value" or intrinsic value. So we can lose more than we had expected. Some people buy only options for this reason.
When buying futures options, however, you pay the premium and the risk too. The chance that you will be in the money and restore your premium payment is the actual risk. There are unlimited opportunities with limited risk. But the disadvantage is that the options generally expire worthless. Leverage is the reason people are buying futures options. You can control the underlying futures contracts with a smaller investment and less risk than buying or selling futures contracts. we pay a premium for doing so, and we am also trading time. Meaning, we only have until the option expires to be correct, so time is a factor in futures options trading also.
Futures options sellers matched the fact that an option would not be profitable for the option buyer within a certain timeframe. Hopefully futures options expire worthless or lose money until the option expires.
We will write about different techniques in another article. There are many ways to trade futures options. You can buy an option or sell an option or you can put on a credit spread where you do both.
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