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The Complete Guide to Futures Trading: What You Need to Know about the Risks and Rewards by Lind-Waldock

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CHAPTER 9

Options on Futures

A Flexible Trading Tool

If you're surprised to find a chapter on options in a book about futures, you're not alone. Clients new to futures are often unaware they can invest in futures options. In fact, they sometimes doubt they heard right: “Options on futures—how can that be? I thought they were two different things.” This confusion will arise because one of the first lessons taught about futures is “they are not the same as options.”

Futures and options are indeed different investment vehicles—just as futures are different from real estate, bonds, or stocks. But these latter four investment classes share one common feature: Each can have an option based on it.

For instance, if you have found a house to buy, you may first negotiate to buy an option on the property, which will give you the sole right to buy that house at a certain price and by a specified time in the future. That is an option on real estate. If you are looking to invest in a local business you can instead purchase an option to buy, allowing time to fully analyze the books. That is an option to buy into an ownership interest.

Perhaps you're more familiar with options on stocks, a mature and popular industry considered mainstream by many investors. Buying a call option provides the right to purchase the underlying stock at a specified price and time; buying a put option gives you the right to sell it at a particular price and time. Options in many forms abound, and each can have a role ...

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