So, call options are also much like insurance - you are paying for a contract that expires at a set time but allows you to purchase a security (like a stock) at a predetermined price (which won't go up even if the price of the stock on the market does). However, you will have to renew your option (typically on a weekly, monthly or quarterly basis). For this reason, options are always experiencing what's called time decay - meaning their value decays over time.
A longer expiration is also useful because the option can retain time value, even if the stock trades below the strike price. An option’s time value decays as expiration approaches, and options buyers don’t want to watch their purchased options decline in value, potentially expiring worthless if the stock finishes below the strike price. If a trade has gone against them, they can usually still sell any time value remaining on the option — and this is more likely if the option contract is longer.
Unlike other investments where the risks may have no boundaries, options trading offers a defined risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the option contract are not met by the expiration date. An uncovered option seller (sometimes referred to as the uncovered writer of an option), on the other hand, may face unlimited risk.
Covered calls can make you money when the stock price increases or stays pretty constant over the time of the option contract. However, you could lose money with this kind of trade if the stock price falls too much (but can actually still make money if it only falls a little bit). But by using this strategy, you are actually protecting your investment from decreases in share price while giving yourself the opportunity to make money while the stock price is flat.
As an example, let's say an initial margin amount of $3,700 allows an investor to enter into a futures contract for 1,000 barrels of oil valued at $45,000—with oil priced at $45 per barrel. If the price of oil is trading at $60 at the contract's expiry, the investor has a $15 gain or a $15,000 profit. The trades would settle through the investor's brokerage account crediting the net difference of the two contracts. Most futures contracts will be cash settled, but some contracts will settle with the delivery of the underlying asset to a centralized processing warehouse.
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.
An option remains valuable only if the stock price closes the option’s expiration period “in the money.” That means either above or below the strike price. (For call options, it’s above the strike; for put options, it’s below the strike.) You’ll want to buy an option with a strike price that reflects where you predict the stock will be during the option’s lifetime.
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".
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.
In the case of perishable commodity, the cost of storage is higher than expected future price of a commodity (For ex: TradeINR prefer to sell tomatoes now rather than waiting for 3 more months to get a good price as a cost of storage of tomato is more than price they yield by storing the same). So in this case, the spot prices reflect current supply and demand, not future movements. There spot prices for perishables are more volatile.
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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.
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.