Futures Options – Opening New Markets
Futures options are similar to futures themselves in that both give the holder the right to buy or sell the underlying commodity for a specific price on a specific day. Beyond this there are some significant difference between the two and how they are traded.
Rights and Requirements
The main difference between futures options and futures has to do with rights and requirements. Futures options give the holder the right to buy or sell (depending on the option) the underlying commodity for a specific price on a specific date while futures obligate the purchase or sale. While there are investment strategies for futures that eliminate the need for an investor to accept delivery of 10 tons of pork bellies, the basic concept is the same; futures require the buyer to take delivery (in one form or another) of the commodity in question.
Futures Options Contracts
Futures options markets trade options contracts, which specify the underlying asset, the expiration date, and the strike price. Those involved in day trading can trade options contracts to make a profit on the difference between the buying price and the selling price when the options are sold before expiration, or to make a profit from the underlying asset when they are exercised.
As with futures contracts, futures options contracts are traded by day traders and longer term traders in futures markets, and also by non traders with an interest in the underlying commodity. When traded for the underlying commodity, options contracts work the same way as futures contracts, but only give the right to buy or sell the underlying commodity rather than the obligation. For example, a farmer will sell options on his cattle if he thinks prices are going to drop before he takes them to market; conversely, a meat processing company will buy futures on cattle if they believe that prices will rise. Both are non-traders but they have interests in the commodity. The final part of the equation is the investor who attempts to make a profit by successfully trading these commodities.
Futures or Cash Settlement
Futures options are settled in either cash or a futures contract in the underlying security when they are exercised. In-the-money, cash-settled futures options are valued using the trading price of the underlying security at expiration, and the profit is placed into the trader's account. In-the-money, futures settled options are converted into the appropriate futures contract, which the trader can then buy or sell to realize the profit or hold the purchase and simply continue commodity trading.
Because futures options contracts only give the holder the right to purchase, successful traders don’t have to purchase losing positions. If an investor is holding a position that has not prospered according to the contract, he or she can just walk away from the agreement and let it expire. This is the benefit of futures options over standard futures contracts; the ability to walk away from a losing position leaves the investor with a reduced exposure. Conversely, an investor that is holding a contract when the buyer does not exercise his or her position has profited by receiving the premium for selling that position. Such a strategy is helpful during negative periods in the market because it allows for profit taking in a less risky manner.
Conclusion As investor confidence builds up, continuing a market uptrend, the smaller capitalization stocks become the next target for the bullish investor sentiment. As can be seen in the NASDAQ chart, the past four weeks of trading has been relatively flat while the Dow was steadily moving upwards. But now a pattern is forming. A Jay-hook pattern is becoming evident, using the 20 day moving average as a support level. The same pattern is forming in the Russell 2000, using the 50 day moving average as a support level. For the investor or trader that wants to maximize the use of their funds, directing more positions towards the smaller capitalization stocks should produce higher percentage returns in this stage of the uptrend. NAS Finding strong candlestick signals or patterns in smaller companies produce a better potential return when it can be easily analyzed that this the portion of the market that is receiving the strongest inflow of funds. This is not rocket science analysis. This is merely using the candlestick signals for confirming common sense investment analysis. The power of candlestick analysis can also be applied to individual stocks or trading entities that may not be influenced by general market conditions. July cotton illustrates when to be buying, without any concern for any other general market indexes. Where do investors usually sell? They are much more willing to get rid of a losing position when they can't stand the pain any longer. That will become evident with a large bearish candle or a gap down in price at the bottom of a trend. Those conditions allow for the candlestick investor to watch for reversal signals that most other investors are not aware of. Candlestick analysis is the application candlestick signals in conditions that make the signals more likely to be effective. July cotton Note in the cotton chart, the downtrend essentially stopped after the gap down followed by a bullish Harami signal. The price moved up to the next target, the T-line. (8EMA) The failure of the T-line illustrated that the first bounce was over. The gap down again followed by excessive selling was an indication to start watching for the next buy signal. A bullish Harami, followed by a gap up in price, not only indicated that the selling had stopped, but that the Bulls were now taking control of the next trend. Candlestick analysis is nothing more than the visual interpretation of what investor sentiment is 'actually' doing. The reoccurring signals/patterns have been witnessed for the past three to four centuries. The statistical probability of the results produced by the signals warrant taking advantage of the information they convey. Once you understand what the signals are revealing, your investment acumen will improve dramatically. You will understand why prices move as they do. Member chat session tonight at 8PM ET - Password available in the Member Area
MEMORIAL DAY MARK DOWN AND MEMBERSHIP SPECIALS
Futures options, although they are quite similar to standard futures contracts, still possess features that make them very desirable for successful trading. This type of trading can open new markets for investors looking to make money.
Market Direction: What is the biggest factor for moving a price? Investor sentiment! If you understand that concept, evaluating price trends becomes much easier. The Dow has had a relatively strong move over the past two months. The other indexes have not had the same robustness. However, in the past few trading days, the NASDAQ, the S&P 500, and the Russell 2000 have started to show more strength. This is a common trend occurrence. If big money is confident in a bullish trend, where is the logical place for them to put their funds? The Dow stocks or the big capitalization stocks equivalent to the Dow stocks. This is a very simple function of size. Big investment funds require big capitalization/high volume stocks.
