For instance, it is possible to construct an option strategy in the futures markets that is affordable without sacrificing the odds of success...but with the convenience comes theoretically unlimited risk. This is easier than it sounds, similar to the way you would borrow money to pay for a house or a car, you can borrow money from the exchange to pay for long commodity option trades. There are an unlimited number of combinations of self-financed trades but they are typically going to involve more short options than long options, or at least as much premium collected on the sold options than that paid for the longs. In essence, the money brought in through the sale of the short options goes to pay for the futures options that are purchased. The result is a relatively close-to-the-money option with little out of pocket expense but theoretically unlimited risk beyond the strike price of the naked short options.
Commodity options provide a flexible and effective way to trade in the futures markets. Further, options on futures offer investors the ability to capitalize on leverage while still giving them the ability to manage risk. For example, through the combination of long and short call and put options in the commodity markets, an investor can design a trading strategy that fits their needs and expectations; such an arrangement is referred to as an option spread. Keep in mind that the possibilities are endless and will ultimately be determined by a trader's objectives, time horizon, market sentiment, and risk tolerance.
Virtual Assistant is Fidelity’s automated natural language search engine to help you find information on the Fidelity.com site. As with any search engine, we ask that you not input personal or account information. Information that you input is not stored or reviewed for any purpose other than to provide search results. Responses provided by the virtual assistant are to help you navigate Fidelity.com and, as with any Internet search engine, you should review the results carefully. Fidelity does not guarantee accuracy of results or suitability of information provided.
If you are buying an option that is already "in the money" (meaning the option will immediately be in profit), its premium will have an extra cost because you can sell it immediately for a profit. On the other hand, if you have an option that is "at the money," the option is equal to the current stock price. And, as you may have guessed, an option that is "out of the money" is one that won't have additional value because it is currently not in profit.
If a company locks in the price and the price increases, the manufacturer would have a profit on the commodity hedge. The profit from the hedge would offset the increased cost of purchasing the product. Also, the company could take delivery of the product or offset the futures contract pocketing the profit from the net difference between the purchase price and the sale price of the futures contracts.

Similarly, if you believe the company’s share price is going to dip to $80, you’d buy a put option (giving you the right to sell shares) with a strike price above $80 (ideally a strike price no lower than $80 plus the cost of the option, so that the option remains profitable at $80). If the stock drops below the strike price, your option is in the money.

When buying a call option, the strike price of an option for a stock, for example, will be determined based on the current price of that stock. For example, if a share of a given stock (like Amazon (AMZN) ) is $1,748, any strike price (price of the call option) that is above that share price is considered to be "out of the money." Conversely, if the strike price is under the current share price of the stock, it's considered "in the money." 


Currency rates are representative of the Bloomberg Generic Composite rate (BGN), a representation based on indicative rates only contributed by market participants. The data is NOT based on any actual market trades. Currency data is 5 minutes delayed, provided for information purposes only and not intended for trading; Bloomberg does not guarantee the accuracy of the data. See full details and disclaimer.
Just as there are several ways to skin a cat, there are an unlimited number of option trading strategies available in the futures markets. The method that you choose should be based on your personality, risk capital and risk aversion. Plainly, if you don't have an aggressive personality and a high tolerance for pain, you probably shouldn't be employing a futures and options trading strategy that involves elevated risks. Doing so will often results in panic liquidation of trades at inopportune times as well as other unsound emotional decisions.
Another example involves buying a long call option for a $2 premium (so for the 100 shares per contract, that would equal $200 for the whole contract). You buy an option for 100 shares of Oracle (ORCL) for a strike price of $40 per share which expires in two months, expecting stock to go to $50 by that time. You've spent $200 on the contract (the $2 premium times 100 shares for the contract). When the stock price hits $50 as you bet it would, your call option to buy at $40 per share will be $10 "in the money" (the contract is now worth $1,000, since you have 100 shares of the stock) - since the difference between 40 and 50 is 10. At this point, you can exercise your call option and buy the stock at $40 per share instead of the $50 it is now worth - making your $200 original contract now worth $1,000 - which is an $800 profit and a 400% return. 
Based on data from IHS Markit for SEC Rule 605 eligible orders executed at Fidelity between April 1, 2018 and March 31, 20198. The comparison is based on an analysis of price statistics that include all SEC Rule 605 eligible market and marketable limit orders of 100-499 shares for the 100 share figure and 100–1,999 shares for the 1,000 share figure. For both the Fidelity and Industry savings per order figures used in the example, the figures are calculated by taking the average savings per share for the eligible trades within the respective order size range and multiplying each by either 100 or 1000, for consistency purposes. Fidelity's average retail order size for SEC Rule 605 eligible orders (100 -1,999 shares) and (100–9,999 shares) during this time period was 430 and 842 shares, respectively. The average retail order size for the Industry for the same shares ranges and time period was 228 and 333 shares, respectively. Price improvement examples are based on averages and any price improvement amounts related to your trades will depend on the particulars of your specific trade.

worked as JPMorgan Equity Analyst, ex-CLSA India Analyst ; edu qualification - engg (IIT Delhi), MBA (IIML); This is my personal blog that aims to help students and professionals become awesome in Financial Analysis. Here, I share secrets about the best ways to analyze Stocks, buzzing IPOs, M&As, Private Equity, Startups, Valuations and Entrepreneurship.

To reiterate, buying options in times of low volatility could prove to be advantageous should the volatility increase sharply. On the other hand, a lack of deviation in the price of the underlying asset will produce lower market volatility and even cheaper option premiums. Once again, pricing is relative and dynamic; "cheap" doesn't mean that it can't get "cheaper".
For example, if you bought a long call option (remember, a call option is a contract that gives you the right to buy shares later on) for 100 shares of Microsoft stock at $110 per share for December 1, you would have the right to buy 100 shares of that stock at $110 per share regardless of if the stock price changed or not by December 1. For this long call option, you would be expecting the price of Microsoft to increase, thereby letting you reap the profits when you are able to buy it at a cheaper cost than its market value. However, if you decide not to exercise that right to buy the shares, you would only be losing the premium you paid for the option since you aren't obligated to buy any shares. 
Many day traders who trade futures, also trade options, either on the same markets or on different markets. Options are similar to futures, in that they are often based upon the same underlying instruments, and have similar contract specifications, but options are traded quite differently. Options are available on futures markets, on stock indexes, and on individual stocks, and can be traded on their own using various strategies, or they can be combined with futures contracts or stocks and used as a form of trade insurance.
For example: Tomatoes are cheap in July and will be expensive in January, you can’t buy them in July and take delivery in January, since they will spoil before you can take advantage of January’s high prices. The July price will reflect tomato supply and demand in July. The forward price for January will reflect the market’s expectations of supply and demand in January. July tomatoes are effectively a different commodity from January tomatoes.
* Sell orders are subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). Trades are limited to online domestic equities and options and must be used within two years. Options trades are limited to 20 contracts per trade. Offer valid for new and existing Fidelity customers opening or adding net new assets to an eligible Fidelity IRA or brokerage account. Deposits of $50,000-$99,999 will receive 300 free trades, and deposits of $100,000 or more will receive 500 free trades. Account balance of $50,000 of net new assets must be maintained for at least nine months; otherwise, normal commission schedule rates may be retroactively applied to any free trade executions. See Fidelity.com/ATP500free for further details and full offer terms. Fidelity reserves the right to modify these terms and conditions or terminate this offer at any time. Other terms and conditions, or eligibility criteria may apply.
Options are powerful because they can enhance an individual’s portfolio. They do this through added income, protection, and even leverage. Depending on the situation, there is usually an option scenario appropriate for an investor’s goal. A popular example would be using options as an effective hedge against a declining stock market to limit downside losses. Options can also be used to generate recurring income. Additionally, they are often used for speculative purposes such as wagering on the direction of a stock.

Futures options can be a low-risk way to approach the futures markets. Many new traders start by trading futures options instead of straight futures contracts. There is less risk and volatility when buying options compared with futures contracts. Many professional traders only trade options. Before you can trade futures options, it is important to understand the basics.
Sometimes corporations enter the forex market in order to hedge their profits. A US company with extensive operations in Mexico, for example, may enter into a futures contracts on US dollars. So, when it comes time to bring those Mexican profits home, the profits earned in pesos will not be subject to unexpected currency fluctuations. The futures contract is a way of securing an exchange rate and eliminating the risk that peso will lose value versus the dollar, making those profits worth less in dollars.
Ally Financial Inc. (NYSE: ALLY) is a leading digital financial services company. Ally Bank, the company's direct banking subsidiary, offers an array of deposit and mortgage products and services. Ally Bank is a Member FDIC and Equal Housing Lender , NMLS ID 181005. Mortgage credit and collateral are subject to approval and additional terms and conditions apply. Programs, rates and terms and conditions are subject to change at any time without notice.
* Sell orders are subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). Trades are limited to online domestic equities and options and must be used within two years. Options trades are limited to 20 contracts per trade. Offer valid for new and existing Fidelity customers opening or adding net new assets to an eligible Fidelity IRA or brokerage account. Deposits of $50,000-$99,999 will receive 300 free trades, and deposits of $100,000 or more will receive 500 free trades. Account balance of $50,000 of net new assets must be maintained for at least nine months; otherwise, normal commission schedule rates may be retroactively applied to any free trade executions. See Fidelity.com/ATP500free for further details and full offer terms. Fidelity reserves the right to modify these terms and conditions or terminate this offer at any time. Other terms and conditions, or eligibility criteria may apply.

The world of commodity options is diverse and cannot be given justice in a short article such as this. The purpose of this writing is to simply introduce the topic of options on futures. Should you want to learn commodity options trading strategies in more detail, please consider purchasing "Commodity Options" published by FT Press at www.CommodityOptionstheBook.com.

When purchasing put options, you are expecting the price of the underlying security to go down over time (so, you're bearish on the stock). For example, if you are purchasing a put option on the S&P 500 index with a current value of $2,100 per share, you are being bearish about the stock market and are assuming the S&P 500 will decline in value over a given period of time (maybe to sit at $1,700). In this case, because you purchased the put option when the index was at $2,100 per share (assuming the strike price was at or in the money), you would be able to sell the option at that same price (not the new, lower price). This would equal a nice "cha-ching" for you as an investor.
×