Options Managed Futures

Futures contracts VS futures options

Futures and options both have their pros and cons. Experienced traders often use both futures and options, depending on the situation. Some traders like to focus one or the other. It is best to fully understand the characteristics of each in order to decide how to trade commodities.

Trading Futures Contracts

Futures contracts are the purest vehicle to use for trading commodities. These contracts are more liquid than option contracts and you don’t have to worry about the constant options time decay in value that options experience.

Futures contracts move more quickly than options contracts, as options only move in correlation to the futures contract. That amount could be 50 percent for at the money options or maybe 10 percent for deep out of the money options.

For day trading purposes, futures contracts make much more sense. There is usually less slippage on futures than options. Futures contracts move quicker than options and they are easier to get in and out of.

Many professional traders like to use spread strategies, especially in the grain markets. It is much easier to trade calendar spreads (buy and sell front and distant month contracts against each other) and spreading different commodities like selling corn and buying wheat.

Trading Options

Many new commodity traders start with option contracts. The main attraction with options for many people is that you can’t lose more than your investment if you buy options. That is true, but if you only risk a small portion of your account on each trade, the chances of running a negative balance is slim.

Trading options can be a more conservative approach, especially if you use option spread strategies. Bull call spreads and bear put spreads can increase the odds of success if you buy for a longer term trade and the first leg of the spread is already in the money.

Futures options are a wasting asset. Technically, options lose value with every day that passes. The decay tends to increase as options get closer to expiration. It can be frustrating to be right on the direction of the trade, but your options still expire worthless because the market didn’t move far enough to offset the time decay.

Just as the time decay of options can work against you, it can also work for you if you use an option selling strategy. Some traders exclusively sell options to take advantage of the fact that a large percentage of options expire worthless. You have unlimited risk when you sell options, but the odds of winning on each trade are better than buying options.

Options don’t move as quickly as futures contracts, but some option traders like it that way. You can get stopped out of a futures trade very quickly with one wild swing. Your risk is limited on options, so you can ride out many of the wild swings in the futures prices. As long as the market reaches your target in the required time, options can be a safer bet.

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Popular Q&A

What are futures contracts and options?

A stock future is an agreement to buy or sell the stock certificate at a fixed price on a certain date. !

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