Using options on a futures contract is a less risky way to step into the futures market. Novice producers (farmers and ranchers) and buyers of agricultural commodities can begin by trading futures options instead of directly approaching the market. You’re exposed to less market volatility and price risk when you purchase or sell a futures contract using options. If you want to start trading futures options, this blog will serve as a guide for you.
Ahead, we’ve covered everything from that you should know about using options in the futures market.
If you purchase an option to buy a futures contract, you are using a “call” option.
If you buy an option on a futures contract to sell it, you have a “put” option.
Determining a Strike Price
When you’re using options to buy or sell a futures contract, you are required to select a predetermined price level for approaching the futures market. These price levels are referred to as strike prices. For instance, if you choose a wheat option with a $6 strike price per bushel, after utilizing the option, you’ll sell or purchase the futures contract at $6.
When trading begins on an option, it’s available on several predetermined price levels below and above the commodity’s current price in the future’s market. For instance, if the May soybean futures is $4 per bushel, strike prices for soybean options will include $3.80, $3.90, $4.00, $4.10, and $4.20. Strike prices are modified according to the fluctuations in the futures prices.
Selecting a Month for Delivery
When you buy an option on a futures contract, you must decide on a delivery month for the commodities. Be mindful that the delivery month for your options and futures contract should be similar. For instance, soybean options have November, February, April, June, and August delivery month, the same soybean futures. If you utilize a November soybean option, you will sell or buy a November futures contract.
How to Close Out Your Option?
If you want to close out your option position, you can do so in three ways:
- By exercising the option
- By offsetting the transaction
- By allowing the option to expire
Using options in the futures market is an excellent strategy for risk management marketing. If you want to learn more about using options on futures contracts for commodities marketing in MI, MN, IN, or TX, get in touch with us.
If you’re new to futures, we can manage your options trading for you as your broker. We have over three decades of experience in commodity broker marketing, along with cattle marketing, corn marketing, wheat marketing, soybeans marketing, oats marketing, live cattle marketing, and more!