Selling Futures Options As An Investment Strategy

 While both futures and options are popular derivative products in their own right, the phrase "future options" might be perplexing for some. Allow us to deconstruct this for you and explain what it all means. We will also provide you with futures and options strategy and examples to offer you realistic insight.

Meaning of Futures Options

By purchasing this option, you will be granted the right to buy or sell a futures contract at a specific price on a predetermined date. Buying or selling a future option trading contract gives the buyer or seller of the option the right, on the contract's expiry date, to buy or sell the underlying futures contract at a price that has been fixed in advance. On the last Thursday of each month, all available options are exchanged in India.

The primary distinction between an option and a futures contract is that an option is a right to buy or sell an underlying asset at predetermined prices, whereas a futures contract is an obligation on the part of buyers and sellers to execute the trade at predetermined prices on the mutually agreed-upon date. Similarly, a futures option is a right that a buyer or seller might exercise to execute a sale or purchase transaction of a futures contract on the expiry date.

Since it is a derivative of a derivative, a future option trading contract is a one-of-a-kind product. A derivative is so named because its value is determined by the underlying asset's value. In this example, the option (a derivative) derives its value from the underlying derivative, which is a futures contract, which is, in turn, a derivative of its underlying assets, such as indices, bonds, commodities, or equity shares. For example, a futures option might be a call or put option contract on commodity futures, interest rate futures, stock futures or any other underlying asset futures. Let us examine the many forms and situations of trade.

What is the Call Future Option?

This is a future option trading contract in which purchasers have the right to buy either commodity, currency or stock futures at a mutually agreed-upon price or striking price on the expiration date of the options. The buyer of call options is considered to be in a long position, which means that he will try to exercise his right to purchase the underlying asset if the strike price is lower than the current price in the futures market. By paying a premium, he acquires this right by acquiring a call option, which he may or may not exercise on the expiry date.

What is a Put Futures Option?

When an option's time period comes to an end, the holder of a put future option trading contract has the right but not the obligation to sell the underlying futures contract. This is because the owner of a put option would be considered to be in a short position and would be trying to sell the underlying future contract at a strike price that is higher than the price at which the futures contract is currently trading.

Wrapping Up

Selling futures options is cost-effective. You can achieve a profitable transaction by timing your trades correctly and selecting the correct strike prices. If trading doesn't appeal to you, another option is to consider investing in upcoming IPOs. Whatever you decide, make sure you always have a Demat and trading account in your name. You cannot invest in the financial markets without one.