The key to understanding options futures is what they are and how the work. By looking at the dynamics these futures contracts you will have a better understanding of the characteristics of options futures and in turn, have additional tools that you need in order to be a successful trader.What Is An Options Futures Contract?The best definition of an options futures contract is a form of trading commodities between buyers and sellers where an asset is sold at a mutually agreeable price and to be executed by a specific date. They are called options futures because it concerns a transaction that will take place in the future at the discretion of the buy. The buyer is simply purchasing the right to make the transaction; if he or she chooses not to complete the deal, it becomes null and void on the expiration date.Options ContractsThere are two different types of options contracts; call options and put options; in options futures, a put option gives its buyer the right to sell the underlying asset while a call option gives the buyer the right to purchase the underlying asset.For example, you decide to buy a call option on corn futures; you are going to buy 1,000 bushels on the 25th of June for a strike price of $5.50 per bushel and the current price is $6.00 per bushel. What you now have is an agreement to buy, if you choose, the corn on the above date for the listed price. If at any time up to the 25th the price of corn is above $5.50, you can sell your 1,000 bushels and take the profit, if you so choose.Possible ScenariosThe date on the contract is the 25th of June; this is known as the expiration date. At this point in the options trading, the buyer must decide by this date if he or she wants to complete the transaction as outlined in the contract or walk away from the deal.Suppose that on the expiration date of your options futures contract, (the 25th), the option value is $6.00 per bushel. You are able to buy the corn for $5.50 and resell it for $6.00, making a profit of $500. (1,000 bushels at a profit of $0.50 each)Conversely, if the expiration date arrives and the price of your corn is only at $5.00 per bushel, you could simply walk away from the deal and let it expire. Remember when commodities trading, the buyer has only paid for the right to purchase the underlying asset of the options futures; he or she does not have to do so. If you allow this contract to expire, you will only lose the premium that you paid when you made the contract; this money will be paid to the seller as his or her profit.There are actually other investment strategies that can be implemented by either buyers or sellers in order to improve their position. For sellers, these techniques usually include stop loss orders because a seller can be vulnerable if prices rise drastically. No matter what the position, options futures have a wide variety of market orders to select.ConclusionOptions futures offer successful trading opportunities to make money with a number of different types of investments. It is important for you to understand the nature of options futures and commodity trading before you get involved in any kind of investments. After you have learned exactly what is involved in options futures, you can get involved, knowing that you have the tools you need to succeed. With options futures, you have the ability to make your investments looking forward to the “future”!
The risk-reward dilemmaIt is often said that any form of trading can become dangerously addictive and is a potential threat of serious erosion of your assets unless you are aware of the inherent risks involved. There is nothing like being aware of possible downside in Futures Trading too; it certainly promises to give handsome returns but the flip side must never be ignored. Every investor has an inherent ability to absorb risk and the degree or capability depends upon a combination of many factors. Established Dubai Stock Brokers will not hesitate to tell you that one cannot expect to earn stupendous returns without being able to take equivalent risks. The trick lies in being able to determine ones threshold and this in not particularly easy as most humans by nature are averse to taking risk.Bare factsCommodity trading in Dubai first saw the light of the day in 2005 with commencement of trading at the Dubai Gold and Commodities Exchange. Proud to be the first derivative exchange in the Middle East and North African (MENA) region the platform is highly lucrative as Dubai, on account of its location, permits longer trading hours by integrating the functioning of regional and international trading. Within a short span since inception, traders have a great avenue for meeting varying requirements of instruments like online CFD trading, trading Forex online and commodity trading in Dubai besides others.Don’t get scared: Be awareIf one maintains a disciplined approach, there is not much to be scared about as there are numerous advantages of trading in futures. The biggest advantage of course is the availability of leverage that requires a trader to maintain only a fraction of the total trade value, in his trading account. On the flip side, leverages can work against you too as it could encourage a higher risk taking than what one is capable of absorbing. Yes, here profits do get enhanced but losses too could strike a heavy blow. Another positive is relatively lower commission costs as it is more affordable to buy/ sell a futures contract compared to dealing in the underlying instrument itself. By design, all futures contracts have considerable liquidity; the extent of liquidity available being dependent upon whether the contract is electronically traded or the pit traded variety which comparatively take up more in terms of commissions and spread.A great feature is the facility to go short on contracts which has the potential to give handsome returns even when markets are headed downwards. What makes futures contracts more lucrative than options is that they do not get affected by a factor called ‘time decay’. Commodities futures do not get affected by approaching expiry dates as they are free from a specified strike price at expiry. Did you know that a majority of futures contracts are not deliverable and are settled in cash at the time of expiry? It is also good to know that some are not and if you do not act in time to settle your contract, you might be facing the real prospect of the traded quantity physically being delivered to your door step!For a great experience in commodities trading, Dubai has to be the pivotal point!
Not all conventional commodity trading folklore is correct. Some is and some isn’t. Much is anecdotal. Most of it is designed to make you feel comfortable in a trade. Feeling “comfortable” is the fastest way to the poorhouse in commodity trading. We are paid to provide liquidity and take on risk. Read on to see if you adhere to this basic and important market law.More S&P 500 and E-Mini Futures Contract Observations: PART 5″Don’t get use to big swings or chops, bear or bull trends. Expect anything, anytime.”Yes, keep a clear, open mind every day you trade. Come into the new day with no biases or expectations. Your mind should be a clean slate. Otherwise you are peering through colored glasses based on old information. In addition, all of us have a tendency to expect what happened previously.We love to fit the world into rigid, repeating patterns. That’s how the brain is wired. Expectations can put us in a rut if the e-mini futures market has been in a long, repetitive chop that we’ve been trading successfully. The first time the market breaks out and starts trending, many of us will keep bucking the trend and give back much of our profits. Be flexible and expect nothing at all.There’s nothing like studying what’s happening right now to get an edge on the futures traders who trade “remotely.” By remotely I mean the day-traders who figure out their buy and sell pivot points the night before – where to enter and exit, etc. without regard to current action. They calculate e-mini retracements, support and resistance points from the past and then put in resting orders based on an end-of-day system. But I feel getting current, live and changing information “RIGHT NOW” can greatly enhance this EOD method. (end-of-day price data)Observation:”Once e-mini futures break above an important point, consider it strong and a buy on a test back down to this point. The market might take its time and make a double bottom to scare the sheep. But usually expect a fast turn-around spike and rally scenario. This is likely if the A-D line is neutral or slightly bullish. Sometimes a too-bullish A-D line with a big run-up is exhaustion and time for a turn. It’s the same thing for big negative A-D line openings with a gap. Look for a big rally after a series of e-mini bottoms and heavy futures contracts buying.”
‘Nuff said.Observation:”Use the line tool to check the A-D line histogram to see if A-D is improving while the price is lower than yesterday, etc. This is a non-confirmation.”Since the general stock advance-decline line is an important trend indicator, you might as well use trend lines and other tools to look for confirmations and non-confirmations. An A-D line that has drastically changed from one day to the next is usually a major indication of a turning point lasting at least for the full trading day, and possibly longer. More commodity S&P 500 and e-mini futures contract articles soon!Good Trading!There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.