Futures trading puts and calls


From a hedging point of view, buying a call option locks in a maximum futures price. For example, a canola crusher could buy a call option to protect against price upside above a certain price level. Another use of a call option is for replacement strategy.

For example, a farmer delivers and prices some canola. Believing that the futures price will rise, the farmer buys call options on a similar quantity of canola to that sold physically.

By doing so, he can benefit from a potential rise in the futures market, thus adding value to the canola already sold. By using the call option purchase for this strategy, risk is limited to possible loss of the premium paid for that call option.

Meanwhile, he has the majority of the proceeds from the canola sale and has reduced risk of spoilage and theft on the quantity of canola sold. Here is an example of a call option purchase using numbers from the ICE Canada canola market. It is this right that gives the call option its value.

You buy an option…then what? If you buy an option, there are three ways to deal with that option: You can exercise the option, that is, create the specific futures position that buying the option has given you the rights for.

When that is complete, you no longer own an option, but now have a new futures position. If you exercise a put option, you will create a sell futures position in your account; if you exercise a call option, you will create a buy futures position in your account.

The specific futures position created will be determined by the characteristics of the option that you owned. You can sell the option as an option for its premium, which might be greater or less than the premium when you purchased that option. This alternative is often the best choice. You can sell an option anytime that futures and options are trading. You may be able to capture some option premium that would be lost when exercising the option or letting the option expire.

Brokerage commissions to sell an option are usually less than when you exercise the option. As the futures price declines that sale price is worth more to a buyer so the put option increases in value. The opposite is true for a put if the futures price increases. Calls and puts on the same underling futures contract with the same expiration month will have a range of available strike prices.

Again, standardized strike prices are set and specified by the option contract. The time value portion of call and put premiums decreases over time. This is referred to as time decay. The rate of decay is not linear, it increases as expiration approaches. Volatility is a function of price movement of an underlying futures contract. Precisely, it is a measurement of price fluctuation up or down, not a sustained upward or downward price trend. Call and put buyers want more volatility and are willing to pay more premium for it.

Call and put sellers want lower volatility, i. They require more premium for the inherent risk of higher volatility levels. Many investors buy calls or puts with no intention of exercising into a long or short underlying futures position. Instead they make an offsetting transaction to take a profit or cut a loss. Offsetting a call position in no way involves a put transaction, and vice versa.

Once a long position is offset a call or put buyer is out-of-the-market and no longer has rights to exercise and buy for a call or sell for a put the underlying futures contract. Once a short position is offset a call or put seller is out-of-the-market and assignment is avoided. The seller no longer has the obligation to buy for a call or sell for a put the underlying futures contract.

The information herein has been compiled by CME Group for general informational and educational purposes only and does not constitute trading advice or the solicitation of purchases or sale of any futures, options or swaps.

All examples discussed are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. The opinions expressed herein are the opinions of the individual authors and may not reflect the opinion of CME Group or its affiliates.

Current rules should be consulted in all cases concerning contract specifications. Although every attempt has been made to ensure the accuracy of the information herein, CME Group and its affiliates assume no responsibility for any errors or omissions. All data is sourced by CME Group unless otherwise stated.

All other trademarks are the property of their respective owners. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Futures and swaps each are leveraged investments and, because only a percentage of a contract's value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade.

Sign In Sign Up. July Soybeans Call. July Euro FX 1. All examples discussed are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. The opinions expressed herein are the opinions of the individual authors and may not reflect the opinion of CME Group or its affiliates. Current rules should be consulted in all cases concerning contract specifications.

Although every attempt has been made to ensure the accuracy of the information herein, CME Group and its affiliates assume no responsibility for any errors or omissions. All data is sourced by CME Group unless otherwise stated. All other trademarks are the property of their respective owners.

Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Futures and swaps each are leveraged investments and, because only a percentage of a contract's value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade.

Sign In Sign Up. July Soybeans Call. July Euro FX 1. September Japanese Yen Call. Strike Price index points. Strike less than futures price. Strike greater than futures price. Strike same as futures price. Time until Expiration Increases. Call and Put Prices Increase. Time until Expiration Decreases. Call and Put Prices Decrease. Effect of time on time value only. CALL prices greater with more time. CALL prices decrease with higher strikes.

Sep Yen Call. Oct Yen Call. PUT prices greater with more time. PUT prices increase with higher strikes. Sep Yen Put. Oct Yen Put. Effect of volatility on time value only.