The Basics of Future Options Trading

Future options trading—a term many may attribute to the vocabulary of Wall Street, willingly leaving this financial move to the professionals. It is common for portfolios to include investments like stocks, bonds and mutual funds; but options are another type of financial instrument that opens the door of opportunity. Option trading can help investors leverage their investments, portfolios and risk.

An option is a contract whereby the buyer has the right to purchase a particular asset at the agreed upon price and by a specified date. It is merely an option to make the purchase, not an obligation. Futures are similar to an options contract, but focuses more on the commodities market, in that the “asset” is something not yet produced. This might include corn, oranges, wool or cotton, for example. Future options were mainly created for the agricultural industry to provide farmers a guaranteed price for their crops, but it has now expanded to other financial instruments like bonds, securities and currencies.

The advantage to options is that the price is locked in regardless of future market conditions, though this can also be a disadvantage in times when the market flourishes. The price agreed upon in the contract is not dependent upon market conditions. The ultimate goal in options is to secure a price in hopes that the future market will fluctuate in a way that makes the price profitable. This is not always the case because of the unpredictability of the market, but is the primary motive behind future options.

Options can be traded like stock, hence the phase options trading. Option trading is simply the process of trading options through a broker who is responsible for helping the trader exchange their options contracts. The platforms used for this trade are called exchanges, six of which are located in the United States. Commodity future option trading is somewhat more complicated but follows a similar process. The difference with commodity option trading is simply that it is the selling and purchasing of options contracts regarding commodities, as opposed to hedges, stocks or the like. Options in general can be risky, but also very profitable. The high risk can certainly result in high reward, but knowledge is key for anyone new to this investment market.