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Hello Traders,
For 2015 I would like to wish all of you discipline and patience in your trading!
Big FOMC this week! Meeting takes place tomorrow and Thursday with much anticipated announcement and language on Thursday, 2 PM EST.
Futures Options 101:
Market Strategies
1. Bullish Market Strategies
| Futures Options Trading Spread Strategy |
Description | Reason to Use | When to Use |
|---|---|---|---|
| Buy a call | Strongest bullish option position | Loss limited to premium | Undervalued option with volatility increasing |
| Sell a put | Neutral bullish option position | Profit limited to debt | Small debit, bullish market |
| Vertical Bull Calls | Buy call, sell call of higher strike price | Loss limited to debt | Small debit, bullish market |
| Vertical Bull Puts | Buy put, sell put of higher strike price | Loss limited to price difference | Large credit, bullish market |
2. Bearish Market Strategies
| Futures Options Trading Spread Strategy |
Description | Reason to Use | When to Use |
|---|---|---|---|
| Buy a put | Strongest bearish option position | Loss limited to premium | Undervalued option with volatility increasing |
| Sell a call | Neutral bearish option position | Profit limited to premium | Option overvalued, market flat, bearish |
| Vertical Bear Calls | Buy at the money put, sell out of the money put | Loss limited to debt | Small debit, bearish market |
| Vertical Bear Puts | Sell call, buy call of higher strike price | Loss limited to stroke price difference minus credit | Large credit, bearish market |
3. Neutral Market Strategies
| Futures Options Trading Spread Strategy |
Description | Reason to Use | When to Use |
|---|---|---|---|
| Strangle | Sell out of the money put and call | Maximum use of time value decay | Trading range market with volatility peaking |
| Arbitrage | Bull and sell similar simultaneously | Profit limited to debt | Any time credit received |
| Calendar | Sell near month, buy far month, same strike price | Near month time value decays faster | Small debit, trading range market |
| Butterfly | Buy at the money call (put), sell 2 out of the money calls (puts), buy out of the money call (put) | Any time credit received | |
| Guts | Sell in the money put and call | Receive large premium | Futures Options have time premium and market in trading range |
| Box | Buy at the money put, sell out of the money put | Small debit, bearish market | |
| Ratio Call | Buy call, sell calls of higher strike price | Neutral, slightly bullish | Large credit and difference between stroke price of option bought and sold |
| Conversion | Buy futures, buy at the money put, and sell out of the money call | Any time credit received |
Futures Options Writing
If you are currently trading options on futures or are interested in exploring them further, check out our newly updated trading guide, featuring 25 commonly used options strategies, including butterflies, straddles, strangles, back spreads and conversions. Each strategy includes an illustration demonstrating the effect of time decay on the total option premium involved in the position. Options on futures rank among our most versatile risk management tools, and are offered on most of our products. Whether you trade options for purposes of hedging or speculating, you can limit your risk to the amount you paid up-front for the option while maintaining your exposure to beneficial price movements. To learn more about CME Group options, you can also visit our Options page.