Option Reference Sheet

Buying of Call: The right but not the obligation to buy (go long) a futures from the strike price.

Buying of Put: The right but not the obligation to sell (go short) a futures from the strike price.

Writing (selling) of Call: The obligation to sell (go short) the futures from the strike price.

Writing (selling) of Put: The obligation to buy (go long) the futures from the strike.

Premium - Option Valuation

An option's price is made up of the following components:

1. Time Value - Time left to expiration. (Time erosion is expected to be the greatest in the final 3 weeks before expiration.)

2. Intrinsic Value - 'in the money' amount in relation to strike price

A) Call - The amount by which the futures is above the strike price.

B) Put - The amount by which the futures is below the strike price.

Writing a put is a margin trade. It is another way of being long. Remember the buyer of a put thinks the market is going down with enough volatility to cover costs and to profit on a price drop. The writer believes that the market will stay flat or go higher. At least, he hopes prices will not drop below the strike price by more than the money collected.

Writing a call is a margin trade. It is another way of being short. Remember the buyer of a call thinks the market is going up with enough volatility to cover costs and to profit from price increases. The writer believes that the market will stay flat or go lower. At least, he hopes prices will not increase above the strike price by more than the money collected.

 

Investors should be aware that trading futures and options involves substantial risk of loss and is not suitable for all investors. There are no guarantees of profit no matter who is managing your money. Past performance is not necessarily indicative of future results.