Part Three: The Mechanics of Buying and Writing Options
Source: National Futures Association; published here with permission. This publication, Buying Options on Futures Contracts: A Guide to Uses and Risks,
is the property of the National Futures Association.
If you purchase an out-of-the-money option, bear in mind that no matter how much the futures price moves in your favor,
the option will still expire worthless, and you will lose you entire investment unless the option is in-the-money at the
time of expiration. To realize a profit, it must be in-the-money by some amount greater than the option's purchase costs.
This is why it's crucial to calculate an option's break-even price before you buy it.
Example: At a time when the March crude oil futures price is $11 a barrel, an investor expecting a substantial price increase
buys a March call option with a strike price of $12.50. By expiration, as expected, there has been a substantial price increase
to $12.50. But since the option is still not worthwhile to exercise, it expires worthless and the investor has lost his total investment.
Page Five
Source: National Futures Association; published here with permission. This publication, Buying Options on Futures Contracts: A Guide to Uses and Risks,
is the property of the National Futures Association.
|
