Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. You can trade options on futures contracts much like you trade options on other securities, by buying or writing call or put options depending on the direction you believe the underlying product will move.

Buying options provides a way to profit from the movement 𓆏of futures contracts, but at a fraction of the cost of bu꧙ying the actual future.

Options on Futures

Options on futures work similarly to options on other securities (such as stocks), but they tend to be cash-settled and of 澳洲幸运5官方开奖结果体彩网:European style, meaning no early exercise. You trade options depending on how you expect the value of the underlying future, called the 澳洲幸运5官方开奖结果体彩网:underlying, to move. You buy a call if you expect the value of a future to increase; you buy a put if you expect the value of a future to fall. The cost of buying the option is the premium. 

Many futures contracts h💝ave options attached to them. Traders also write options.

Gold options, for example, are based on the price of gold futures, both cleared through the 澳洲幸运5官方开奖结果ꦚ体彩网:Chicago Mercantile Exchange (CME) Group. Buying the future requires putting up an initial margin of $8,350—this amount is set by the CME, and varies by futures contract—which gives control of 100 ounces of gold. But buying a $2 澳洲幸运5官方开奖结果体彩网:gold option cos💎ts $200 (plus commissions): $2 x 100 ounces = $200.

Options are bought and sold before expiration to lock𝐆𝄹 in a profit or reduce a loss to less than the premium paid.

Buy a call option if you believe the price of the underlying will increase. If the underlying increases in price before th🎃e option expires, the value of your option will rise. If the value doesn't increase, you lose the premium paid for the option.

Buy a 澳洲幸运5官方开奖结果体彩网:put option if you believe the price of the underlying will decrease. If the underlying drops in value before your option expires, your option will increase in value. If the underlying doesn't drop, you lose the premium paid for the option.

澳洲幸运5官方开奖结果体彩网:Option prices are also based on "Greeks," variables that affect the price of the option. Greeks are a set of 澳洲幸运5官方开奖结果体彩网:risk measures that indicate how exposed an option is to 澳洲幸运5官方开奖结果体彩网:time-value decay.

Writing Options for Income

When someone buys an option, someone else had to wri🐻te that option. The writer of the option, who can be anyone, receives the premium from the buyer upfront (income) but is then liable to cover the gains attained by the buyer of that option.

The option writer's profit is limited to the premium received, but liability is large since the buyer of the option is expecting the option to increase in value. Therefore, option writers typically own the underlying futures contracts they write options on. This hedges the potential loss of writing the option, and the writer pockets the premium. This process is called "澳洲幸运5官方开奖结果体彩网:covered call writing" and is a way f💦or a trader to generate trading income using options on futures they already have in their portfolio. 

A written option can be closed out at any time to lock in a portion of the premium or limit a lo🦩ss.

Trading Options Requirements

To trade options, you need a margin-approved 澳洲幸运5官方开奖结果体彩网:brokerage account with access to options and futureಌs trading.🐠 Your broker will ask you to fill out an options agreement to be sure you understand the risks of this type of trading, and will collect information about you, including:

• Your investment objectives
• Your investing experience
• Your net worth
• What kind of options you'd like to trade

Options on futures quotes are available from the CME (CME) and the 澳洲幸运5官方开奖结果体彩网:Chicago Board Options Exchange (), where options and futures trade. You can also find quotes in the 澳洲幸运5官方开奖结果体彩网:trading platform provided by options brokers.

The Bottom Line

Buying options on futures may have certain advantages over buying regular futures. The option writer receives the premium upfront but is liable for the buyer's gains; because of this, option writers usually own the underlying 澳洲幸运5官方开奖结果体彩网:futures contract to hedge this risk. To buy or write options requires a mar🧜gin-approved brokerage account with access to CME or CBOE products.&🅠nbsp;