If you've ever studied a second language, you know how hard it can be. But once you learn, say, Spanish as a second language - learning Italian as a third would be much easier since both have common Latin roots. To get facility with Italian as a third language, you would need only to grasp minor changes in word forms and syntax. Well, the same could be said for learning options. To learn the basics, read our Options Basics Tutorial.
For most people, learning about stock options is like learning to speak a new language, which requires wrestling with totally unfamiliar terms. But if you already have some experience with stock options, understanding the language of options on futures becomes easy.
In fact, basic concepts such as delta , time value and strike price apply the same way to futures options as to stock options, except for slight variations in product specifications, essentially the only hurdle to get passed. Stock Index Options on Futures The first thing that probably throws a curve ball at you when initially approaching options on futures is that you may not be familiar with a futures contract , the underlying instrument upon which options on futures trade.
Recall that for stock options, the underlying is the equity issue e. Since most investors understand how to interpret stock prices, figuring out the underlying is easy.
These, however, are insignificant obstacles in today's online environment, which offers so much information just a click away.
This article will hopefully interest you in exploring these exciting markets and new trading opportunities. For more background knowledge, read Understanding Option Pricing. Although these are cash-based futures options i. You want to buy low and sell high.
Important Differences and Characteristics There is, however, a key difference between futures and stock options.
Volatility and time-value decay also play their part, just like they affect a stock option. The active month is known as the "front-month contract", and it is the first of the three delivery months listed in Figure 2. Like for nearly all options on futures, there is a uniformity of pricing between the futures and options. This makes things easy.
Just as we would expect for stock put and call options, the delta in our examples below is positive for calls and negative for puts.
The strikes farthest from the money put and call will have the lower delta values, and those nearest the money put and call have higher delta values. Both the sign and the size of the change in dollar value for each option make this clear. Meanwhile, the farther-from-the-money put options, such as the option with a strike price of and delta of Conclusion While there are many ways to trade using these options, many traders prefer to be a net seller of options.
As for other options on futures markets, you'll need to get familiar with their product specifications - such as trading units and tick sizes - before doing any trading. Having said that, however, I am sure you will find that becoming fluent in a second options language is not as difficult as you might initially have thought.
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