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 When you go long (buy) an option

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Join date : 2011-02-12

PostSubject: When you go long (buy) an option   Thu Feb 17, 2011 1:52 pm

The futures contract in basic terms is really a contract to buy or sell by which two parties enter, they’ll agree on a price today for a ‘future’ date when the commodity will be purchased. As with any form of contract, this is a binding legal arrangement, and because of this is traded on regulated exchanges. This particular derivative is speculative as you are speculating on the future price and the market movements.

Commodities are often Forex, stock indexes, metals, foods, energy, grains, etc. Often times future trading is confused with option trading. The one similar attribute is that they both offer an expiration day of the contract. Futures contracts are an obligation to buy the actual share, whereas the choices contract states the authority to purchase the product in a set price (strike) before its expiration. When you go long (buy) an option, the risk is restricted to what was paid.

Futures trading uses leverage which can make this a high risk product, since this risk could be substantial, you should employ some risk management strategies and so what can happen if you do not make this important. Since one can use more capital than they’ve, if not fully monitored can lose over contributing to what is within their account.

You will find quite a few important rules that anyone that is trading futures will want to abide by. First, try to instill your brain set to only trade future positions based on their performance. When the position has not shown any gain the end of day two, exit or close that position. As with all trading instruments don’t get emotional, do not second guess yourself, and realize you may have many losses before you begin to profit. Also it is usually best to not to put all your capital in a single market, and never over-trade.

Investors whom generally do well when trading in futures are the type that first of all know their market. They did their research, analyzed historical data as well as trends. Most possess a plan of action and follow it, and they are good planners. They understand how to speculate and be aware of power of hedging. They have also carefully structured a strategic plan, and they also established their risk capital. This means they are fully aware how much they can lose, and it will not cause any ill effects on their everyday living expenses.

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