OPTIONS: A Primer in .NET framework

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like a quick death while buying options can be like a slow bleeding to death type of trade due to the time until expiration. But, wrong is wrong, any way you look at it. So I think options may have been given a bad rap and abused by traders. If 80 percent to 90 percent of the options expire worthless and traders lose their premium money, the answer must be to do the opposite that is, you must write or sell options to make money eight out of ten times by selling option premium. The probabilities seem to be in your favor. However, there is one glitch when writing options: Your profit potential is limited and your risk is unlimited. Therefore, options writing usually involves more risk capital, as there are generally margin requirements that have to be met. It is the two times out of ten when you are wrong that selling options can kill you and wipe away any trading profits. Of course, no method can be guaranteed to trade profitability. The unpredictability of the markets and the severity of market moves require investors to be more knowledgeable and diverse in their trading techniques when they trade options. At the very least, though, traders should become familiar with options. The key to making money in any investment, first of all, is to be in the market and to establish a position before the market moves. Timing the entry or exit is most of the battle; having the right amount of contracts is the rest. Again, the important element is timing. Being in the market before it moves and participating with a good balance of instruments relative to your risk capital is considered establishing a position. In futures and options, that could be two positions for small traders. For an extremely large trader, it could mean having a thousand positions. For an investor in options, timing is one of the key elements in calculating the value of an option. Being in the market too early will result in an option expiring worthless. Positioned properly, options can be very helpful in certain situations. In the following pages, I explain some of the basics of using options on futures, give examples of different strategies, and demonstrate how options can be combined with a futures position to act like an insurance policy.
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To start, there are two types of options: calls and puts. You can be a buyer or a seller. The price at which an option is bought or sold is called the premium. A buyer or long option holder of a call has the right, but not the obligation, to be long a futures position at a specific price level for a specific period of time. For that right, the buyer of a call pays the premium. A buyer or long option holder of a put has the right, but not the obligation, to be short
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a futures position at a specific price level for a specific period of time. Again, for that right, the buyer of a put pays a premium. For option buyers, the premium is a nonrefundable payment, unlike the good-faith deposits or performance bonds required for a futures contract. Premium values are subject to constant changes as dictated by market conditions and other variables. A seller or option writer of a call or put grants the option buyer the rights conveyed by that option. The seller receives the premium that has been paid by the buyer. Sellers have no rights to that specific option except that they receive the premium for the transaction and are obligated to deliver the futures position if assigned according to the terms of the option. A seller can cover his or her position by buying back the option or by spreading off the risk in other options or in the underlying futures market if market conditions permit. A buyer of an option has the right to either offset the long option or to exercise the option at any time during the life of the option. When a buyer exercises the option, he or she gets the specific market position (long for calls and short for puts) in the underlying futures contract at the specific price level as determined by the strike price. Options are generally exercised when they are in the money. In fact, in the futures market, if an option settles in the money at expiration, it will automatically be exercised for the buyer unless the buyer gives an order to abandon the option. In that case, the option premium will be lost, and the option writer will be released from his or her obligation to accept the opposite position. Three major factors determine an option s value or premium:
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