As an example, let's say a farmer is expecting to produce 1,000,000 bushels of soybeans in the next 12 months. Typically, soybean futures contracts include the quantity of 5,000 bushels. The farmer's break-even point on a bushel of soybeans is $10 per bushel meaning $10 is the minimum price needed to cover the costs of producing the soybeans. The farmer sees that a one-year futures contract for soybeans is currently priced at $15 per bushel.
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.
All investors should know how to trade options and have a portion of their portfolio set aside for option trades. Not only do options provide great opportunities for leveraged plays; they can also help you earn larger profits with a smaller amount of cash outlay. What’s more, option strategies can help you hedge your portfolio and limit potential downside risk.
Traders that are willing to accept considerable amounts of risk with the prospects of limited reward, can write (or sell) options, collecting the premium and taking advantage of the well-known belief that more options than not expire worthless. The premium collected by a commodity option seller is seen as a liability until the option is either offset (by buying it back), or it expires. This is because as long as the option position is open (the trader is short the commodity option), there is substantial risk exposure. Should the futures price trade beyond the strike price of the option, the risk is similar to holding a commodity futures contract outright.
The information contained in this article is provided for general informational purposes, and should not be construed as investment advice, tax advice, a solicitation or offer, or a recommendation to buy or sell any security. Ally Invest does not provide tax advice and does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances.
Purchasing a call option is essentially betting that the price of the share of security (like a stock or index) will go up over the course of a predetermined amount of time. For instance, if you buy a call option for Alphabet (GOOG) at, say, $1,500 and are feeling bullish about the stock, you are predicting that the share price for Alphabet will increase. 
• Put Options – Give the buyer the right, but not the obligation, to sell the underlying at the stated strike price within a specific period of time. The seller of a put option is obligated to deliver a short position from the strike price (accept a long futures position) in the case that the buyer chooses to exercise the option. Keep in mind that delivering a short futures contract simply means being long from the strike price.
Traders that are willing to accept considerable amounts of risk with the prospects of limited reward, can write (or sell) options, collecting the premium and taking advantage of the well-known belief that more options than not expire worthless. The premium collected by a commodity option seller is seen as a liability until the option is either offset (by buying it back), or it expires. This is because as long as the option position is open (the trader is short the commodity option), there is substantial risk exposure. Should the futures price trade beyond the strike price of the option, the risk is similar to holding a commodity futures contract outright.
Still other traders can make the mistake of thinking that cheaper is better. For options, this isn't necessarily true. The cheaper an option's premium is, the more "out of the money" the option typically is, which can be a riskier investment with less profit potential if it goes wrong. Buying "out of the money" call or put options means you want the underlying security to drastically change in value, which isn't always predictable. 

Puts are more or less the mirror image of calls. The put buyer expects the price to go down. Therefore, he pays a premium in the hope that the futures price will drop. If it does, he has two choices: (1) He can close out his long put position at a profit since it will be more valuable; or (2) he can exercise and obtain a profitable short position in the futures contract since the strike price will be higher than the prevailing futures price.
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".
As shown above, a long options trade has unlimited profit potential, and limited risk, but a short options trade has limited profit potential and unlimited risk. However, this is not a complete risk analysis, and in reality, short options trades have no more risk than individual stock trades (and actually have less risk than buy and hold stock trades).
Of course, many investors, especially new investors, are skittish about options. After all, no investor is required to trade this way, and the transactions can seem complicated. But once you know the pros and cons of this type of investing, it can be a powerful part of your strategy. No investors should be sitting on the sidelines simply because they don’t understand options.

When buying or selling options, the investor or trader has the right to exercise that option at any point up until the expiration date - so simply buying or selling an option doesn't mean you actually have to exercise it at the buy/sell point. Because of this system, options are considered derivative securities - which means their price is derived from something else (in this case, from the value of assets like the market, securities or other underlying instruments). For this reason, options are often considered less risky than stocks (if used correctly). 
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