Ask a Broker

ISSUE 610 | OCT 2007

Q: What are some options strategies for a beginner in the futures market?

A: Lind Plus Senior Market Strategist Thomas J. Mikulski answers

First, if you are completely new to options, you might want to check out the Lind-Waldock Web site's "All About Options" area, and our options terms glossary. I won't get into the basic definitions, but rather, explain briefly how you can use options to trade.

To start, there is the simple long or short position, similar to futures, but using options. Long options are a safer way to speculate, because your risk is defined when you buy options. With futures, your risk is virtually unlimited whether you are long or short. If you believe that the market is going to move in a certain direction, or a certain price within a specific timeframe, you can use options accordingly. You can purchase a call if you believe the market will go higher, or purchase a put if you believe the market will go lower. Your risk is limited to the amount you pay for the option (plus commission costs) based upon how close your strike price is to the underlying future. In order to make money, you have to be with the trend.

Short options are a bit different. You collect a specific monetary amount as an options seller, known as premium. However, you face unlimited risk. It doesn't sound very attractive at first, but realize that over 80 percent of options expire out of-the-money and worthless. The short option seller is banking on the market NOT going to certain level. My advice is to choose safety over greed.

For example, if corn futures are trading at $3.50 a bushel, and I can collect 6-8 cents for the $4.20 calls, I would rather do that than collect 15 cents for a $3.80 call. Why? Because if the market starts to rally I have ample time to gauge my risk and plenty of time to get out if I have to.

Bull call spreads and bear put spreads are another trend-reliant option strategy that is similar to the long call or put, with two differences. Because the option you are selling is partially funding the buy side, you pay less and risk less. To reach full profit potential, you need both options to expire in-the-money. Using spreads, you can often get a little closer to the money than by trading just one option in isolation.

The last strategy I am going to cover is the strangle. The strangle uses both a call and put, out-of-the-money, on the same side. With the long strangle you are hoping that the market will catch a sizable move within a specific timeframe, but are unsure which direction the market will move. You add the prices of both options you are buying, so your cost is higher. The short strangle is banking on the thought that the market will stay within a certain range, within a certain timeframe. You take in more premium, but you have potential risk on both sides.

Please feel free to call me to discuss this topic further, and to tailor a specific strategy for your needs. Ask about our special half-off commissions offer for new clients.

Thomas J. Mikulski is a Senior Market Strategist with Lind Plus, Lind-Waldock's broker-assisted division. He can be reached at 800-643-4455 or via email at tmikulski@lind-waldock.com.

You can learn more about advanced options strategies at Lind-Waldock's Futures Options Forum, a live online event co-sponsored by CME Group. You can still attend our October 31 and November 7 sessions at no cost. Register here. This event will also be available online in our Events archives after its conclusion.

Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.

Futures trading involves substantial risk of loss and is not suitable for all investors.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

© 2007 MF Global Ltd. All Rights Reserved.