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Understanding The Advantages of Futures Options
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Futures Option spreads are risk managing trading strategies. Futures Option Spreads can consist of many different strategies of buying and/or selling options at different strike prices, months and so on. Of the many different types of futures option spreads, this particular article we will focus on the futures option debit spread.
When taking a long position in an option, your risk is limited to the amount of premium paid while having unlimited upside potential. When taking a short position in an option, your risk is unlimited and your potential profit is limited to the premium collected. When you combine these two trades into a spread, the unlimited risk that comes with selling an option is removed by the purchasing of another option.
A debit spread is a futures option spread constructed when a trader buys a close to the money call or put option and sells a farther out of the money call or put option at the same time. The trader expects the difference of these two premiums to widen in order to profit from them.
There are two types of debit futures option spreads: the "Bull Call" spread and the "Bear Put" spread. The bull call spread is a futures option spread designed to profit if the price of a commodity rises. A bull call spread is constructed by buying a call option with a lower strike price while selling another call option with a higher strike price. To properly execute a bull call spread, the trader will purchase an option call with the lower strike price at-the-money while selling an option call with a higher strike out-of-the-money. Both of these calls must be in same underlying commodity and have the same expiration date.
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