Future Trading Strategy & Option Trading Strategy

Learn the most effective strategies for buying and selling options on futures contracts. Also learn producer and consumer hedging strategies.

*The information contained within this webpage comes from sources believed to be reliable. No guarantees are being made to the content's accuracy or completeness.

Common Option Trading Strategies

Bull Call Spread

A bull call spread is is a commodity option trading strategy used in anticipation of higher prices during times of high option volatility premiums. The spread is the purchase of a call option and the simultaneous sale or granting of a call option further away from the money. As the futures market moves higher the purchased option's premium appreciates more than the granted option. Learn more about options>>

The maximum profit potential is the difference between the strike prices minus trading costs. The maximum loss potential is the total cost of the spread. An example would be buying a $4 December corn call for $1500 and granting a $4.60 December corn call for $500. The net premium cost is $1000 + trading costs ($100)= $1100 total cost per spread. The maximum possible value of the spread at expiration would be 60 cents or $3000- $1100 cost = $1900 profit potential.

Bear Put Spread

A bear put spread is used just like a bull call spread but is used in anticipation of lower prices and therefore uses puts instead of calls. An example would be buying a $4.60 December corn put and granting a $4 December corn put for a total cost of $1100 just like above. The risks and profit potential are the same in these examples.

Straddle

A straddle is used to take advantage of a large price move up or down. Sometimes the anticipated price move is any way but sideways in a big way. This strategy involves buying a put and a call at the same strike price (preferably at the money). An example would be buying a $4 December corn call and buying a $4 December corn put when the December corn futures price is at $4. The expectation of this strategy is for either the call's or the put's premium to increase enough to offset the costs and make a profit.

Strangle

A strangle is used to take advantage of a large price move up or down just like the straddle but it uses out of the money strike prices. An example would be buying a $4.10 December corn call and buying a $3.90 December corn put when the December corn futures price is $4.

Common Futures Trading Strategies

Spreads

There are many types of futures spreads but the investor is anticipating either a narrowing of the price spread or a widening of the price spread of the different futures contracts. An example of a same market narrowing spread futures trading strategy would be going long July corn and going short December corn in expectation that the old crop (July) prices will go higher but the new crop prices (Dec) will come down in expectation of a huge harvest. Let's assume that the spread is 18 cents when the position is initiated and narrows to 10 cents and is then offset. The investor gained 8 cents per futures spread in this example. Learn more about futures >>

Spreads can be used in different futures markets too. Let's assume that an investor believes that natural gas demand will increase at the expense of heating oil. The investor might go long December natural gas and go short December heating oil expecting the price spread between the two markets to widen. Visit futures spread trading to learn more.

Common Future and Option Order Ticket Types

The Market Order

The market order is the most frequently used order. It is a very good order to use once you have made a decision about opening or closing a position. It can keep the customer from having to chase a market trying to get in or out of a position. The market order is executed at the best possible price obtainable at the time the order reaches the trading pit. Beware of thin markets because bid/asks and slippage can be extreme.

The Limit Order

The limit order is an order to buy or sell at a designated price. Limit Orders to buy are placed below the market while limit orders to sell are placed above the market. Since the market may never get high enough or low enough to trigger a limit order, a customer may be left out of the market if they use a limit order. In most instances, (the market must trade through the limit price for the customer to get a fill.) 

Market If Touched (MIT)

MIT orders are the opposite of stop orders. Buy MIT orders are placed below the market and Sell MIT orders are placed above the market. An MIT order is usually used to enter the market or initiate a trade. An MIT order is similar to a limit order in that a specific price is placed on the order. However, an MIT order becomes a market order once the limit price is touched or passed through. An execution may be at, above, or below the originally specified price. An MIT order will not be executed if the market fails to touch the MIT specified price.

Stop Orders

Stop orders can be used for three purposes:
1. to minimize a loss on a long or short position,
2. to protect a profit on an existing long or short position, or
3. to initiate a new long or short position.
A buy stop order is placed above the market and a sell stop order is placed below the market. Once the stop price is touched, the order is treated like a market order and will be filled at the best possible price. Stops do not guarantee your price. Volatile markets can trade well through your stop price before another trade occurs to fill your order.

Market on Opening (MOO)

This is an order that the customer wishes to be executed during the opening range of trading at the best possible price obtainable within the opening range. Some exchanges to not accept these orders.

Market on Close (MOC)

This is an order that will be filled during the final seconds of trading at whatever price is available. A floor broker has the right to refuse this type of order up to 15 minutes before the market closes.

Fill or Kill

The fill or kill order is used by customers wishing an immediate fill, but at a specified price. The floor broker will bid or offer the order three times and immediately return either a fill or an unable.

One Cancels the Other (OCO)

This is a combination of two orders written on one order ticket. This instructs our floor personnel that once one side of the order is filled, the remaining side of the order should be cancelled. By placing both instructions on one order, rather than two separate tickets, the customer eliminates the possibility of a double fill. (This order is not acceptable on all exchanges.)

Spread

The customer wishes to take a simultaneous long and short position in an attempt to profit via the price differential or "spread" between two prices. A spread can be established between different months of the same commodity, between related commodities or between the same or related commodities traded on two different exchanges. A spread order can be entered at the market or you can designate that you wish to be filled when the price difference between the commodities reaches a certain point (or premium). For example: Buy 1 May Crude Oil, Sell 1 August Crude Oil plus 80 to the August sell side. This means that the customer wants to initiate or liquidate the spread when August Crude Oil is 80 points higher than May Crude Oil. Typically a spread order goes to a spread broker. Visit futures spread trading to learn more.

To learn more go to option trading basics, commodity trading basics and investment glossary.

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