Options Trading Tutorial

A while back, I received several emails from readers wanting to know if they should short the crude oil market because of its lofty price levels. I responded that I don’t give specific trading recommendations, but I certainly do want to help my readers succeed at the difficult task of trading futures markets. Given the sharp runup in crude at the time, and the rising volatility of the grain futures during that same timeframe, it was a good time to discuss trading options on futures–specifically buying puts and calls. You can also sell options, but your financial risk is not limited like it is when you buy an option. I won’t get into selling options in this feature.

I know that many beginning (and even veteran) traders think options trading is too complicated, and they don’t have a clue about the vega, theta, delta and gamma pricing formulas–or the strangles, straddles, butterflies and other such options trading methods. Well, don’t worry. I’m not going to get into those complex strategies in this column.

Entire books have been written on options and options trading strategies, but I will only focus on basic low-risk and limited-risk trading strategies for beginning traders (and veterans, too). I’ll also talk about using options to “hedge” winning trading positions in volatile markets. I do suggest that if you are interested in trading options, you should read a book or two on options trading. Again, you don’t have to be a rocket scientist to employ simple options trading strategies.

First, I am going to assume readers know the definition of an option on a futures contract, and also the difference between a put option and a call option and “in the money” and “out of the money.” (If you don’t know the meaning of these terms, that’s okay. Just go to one of the big futures exchange websites, and you can find a glossary of trading terms, digest the options terms and then read this article.)

Back to the big runup in crude oil recently. It certainly is tempting to want to short that market at present levels. However, remember that to successfully trade futures you not only have to be right on market direction, you also have to be correct on the timing of the market move. Furthermore, you can be right on market direction and very close to being right on timing the trade, but still lose your trading assets because of market volatility. In crude oil, for example, a trader could establish a short position two days before the top in the market is in, and still be stopped out and lose his trading assets because of the high volatility.

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Related posts:

1. How To Trade Oil Futures Options – Trading Options on Futures Oil Contracts
2. Tell Me How To Trade Options And Futures.?
3. How To Trade Futures And Options – Short Review on Simple Options Trading Strategies
4. Call Options Ratio for a Net Credit, Risk Profile, selling options, broken wing butterfly
5. A stronger dollar weighed on crude futures, sending oil stocks into the red