Theresa84
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Mar 3, 2011, 6:45 PM
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Basics about Call Option Trading for New trader
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| Trading in futures and options involves a substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. So by learning this information you will be able to see how options work and become more knowledgeable in creating different strategies. Your broker may be able to assist you in developing your trading skills and your knowledge base about the product.
A futures call option is known as a bullish stance on the market, and people buy them from those that own positions in the market or those that feel the market will trend downward. A futures call option is used when you feel that a certain market will trend in an upward direction. Have you ever had a feeling that gold or another market is cheap but you don’t have thousands of dollars to spend? Many have been in this situation, so don’t feel bad but handle your business and do something about it. No matter what you decide to invest in be sure the money you invest is risk capital only and that you can afford to lose it all and more. Sitting on the sidelines will get you nowhere. As you learn more about call options you will see that a premium is paid to own futures call option. This premium is invested to own the futures call option until it expires, so a little money can put you in a position to trade the market.
Futures call option contracts are not complicated once you get used to them. The most sought after information includes options trade strategies, futures call option pricing, and other information to help understand option trading.
When you learn how to trade options you will often hear people talking about option spreads. When a person uses two or more options under the same underlying market it is called an option spread. There have been many types of spreads known in the trading world that have been implemented, but the important thing is that one understands the nature of using spreads. Every spread has its own use and carries different risk and reward scenarios.
Traders will use option spread techniques for many different reasons and options research will help them choose. Certain spreads work better in certain market conditions to maximize risk and reward scenarios or minimize exposure and initial premium costs. We have compiled a list of some of the most common spreads and many of these spread terms will become familiar to you as you learn how to trade options.
The Call Spread
Call spreads are also known as vertical spreads or bull call spreads (when the spread results in a net debit) and bear call spreads (when the spread results in a net credit). They consist of a long call at a certain strike price and a short call at another strike price on the same underlying futures contract. This strategy is used by buying and selling the same amount of call options at the same time – a 1:1 ratio. A call spread is used to build profit from either a neutral, bull, or bear market.
In a bull call spread, the buyer purchases a call with one strike price and sells another call option with a higher strike price. These options are both for the same underlying futures contract and with the same expiration date. Since the long option has the lower strike price – or better price at which to be long the underlying contract – it will be more expensive therefore the spread will result in a net debit. A bull spread is used for a particular market bias. It results in a profit when the underlying market rises. Loss of premium paid occurs when the market does not trade to or through the strike price of the long option side of the spread.
Bear call spreads are short the call option with the lower strike price and long the further from the money call option. Since the option with the lower “strike” price for the underlying futures will be worth more money, this kind of spread results in a net premium credit. Profit occurs when both options expire worthless. Risk is capped as the difference between the two strike prices. If the underlying market moves through the short option strike price, loss will continue until it hits the short option strike price at which time the two resulting positions if exercised would result in offsetting futures contracts.
Spread options can be used in many situations. Understanding these spreads can give you hopefully enough insight to make the right decision at the right time. Although spreads can be intimidating or even confusing at first, there are straightforward ways to explain them.
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