Futures option trading without the high outlay of funds

Consider futures option trading if you want to make money in the futures market, but don't have a lot of cash to spare. Trading options, whether in futures or otherwise, has always been a way to take advantage of price movements without a huge amount of cash.

Futures option tradingIt takes skill, but there is plenty of software available to help you succeed and learn how to make money on options. The contract has a specific price for the underlying asset and a set date when it expires.

Futures option trading and the risk

In futures option trading, you're only risking the cash outlay, unless you write the option. The writer of the option has far more exposure. If you sell a call option and the price rises, you're under an obligation to fill that contract, which is why most people who write calls own the underlying contracts. However, if the price falls, the person purchasing the contract is under no obligation to buy. 

The same holds true on a put. The writer has to buy the futures for the price stated in the contract if the price drops, but if the price rises, the purchaser doesn't have to sell. With futures option trading, as with all option trading, writing a naked call, one in which the writer doesn't own the underlying contracts, is the riskiest of all.

Rewards for a small outlay of cash

If you were purchasing the underlying asset for an option, you'd normally have a large outlay. While you can purchase futures contracts on a margin, which is a lower outlay of cash, you still have to have a larger amount of money to start with. For instance, the cost of buying on a margin might be $2000 whereas the cost of buying an option contract might be around $800 for a call option, the right to buy at a specified price. 

The premium, cost of the option, will also be far cheaper if you “buy out-of-the-money.” That means if you buy a call contract where the strike price, the price at which you can buy the underlying asset, in this case, is higher than the market price. The higher the strike price over the present market price, the lower the cost of the option, particularly as you approach the option expiration date.

When you buy options, you'll never lose more than your initial investment, but buying a contract on a margin can expose you to far more if the underlying asset fluctuated wildly. It could subject you to a margin call where you have to sell all your assets in your account to make up the difference or even come up with funds you may not have.

Futures option trading and the right tools

While no system of trading is fool proof, having good software or a platform with helpful software tools can make it easier to trade and boost your profits. Look for online sites that offer both charts and tutorials for option trading if you haven't already established a brokerage account. You can derive a wealth of knowledge in this area and use your trading site's educational information, including practice trading accounts, to test your skill and provide tools for successful futures option trading. 

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