Commodity Futures Equivalent

Commodity Futures Equivalent

By
www.CandlestickForums.com

A commodity futures equivalent is a
calculated comparison of value between
futures contracts and options contracts
on commodity futures.


Commodity futures trading and
commodity futures options trading both
deal with the future price of underlying
commodities.


A futures contract confers an obligation
on both parties. The futures buyer must
by and the futures seller must sell the
commodity on the contract expiration
date.


Likewise selling puts and selling calls on
commodity futures contracts requires
that the seller honor the contract if
exercised.


However, the buyer of an options
contract in the commodity futures
market has the choice of exercising the
option on or before its expiration date.


The concept of a commodity futures
equivalent is something that is more
easily understood after Commodity and
Futures Training or Options Training with
Stephen Bigalow.


The futures equivalent of an option
contract or set of contracts is obtained
from the number of options and the risk
factor or delta factor of the options.


The delta or risk factor is how much an
option contract will change in value if
the underlying futures contract changes
by one unit. Thus 20 option contacts
with a risk factor of 0.1 will be 2 futures
equivalent contracts.


The commodity futures equivalent is
calculated from the number of options
contracts in hand and the previous day’s
delta or risk factor.


This calculation is a useful tool for the
options trader for comparing the relative
values of futures trading to options
trading of the futures market on the
same commodity with the same
expiration date.


When used in conjunction with technical
analysis tools such as Candlestick
charting the futures equivalent will help
traders choose trading options markets
on futures or futures markets on
commodities themselves.


Trading options on futures contracts may
seem excessively complicated to some
interested in developing options
strategies or planning to simply trade
futures.


What futures and options together
provide is the choice of exercising a
futures contract or not.


Trading futures contracts by way of
options allows for trading futures that
are considered more speculative and
more risky with less risk.


Buying an option gives the trader the
choice of executing the option and thus
buying or selling a futures contract.


In an extremely volatile market in
commodities this may be a good way to
manage investment risk while
maintaining the possibility of trading
when the conditions are right.


The cost of options trading the futures
market can be more that simply trading
commodities.


The trader will pay a premium for buying
puts or buying calls that he or she would
not pay when simply trading futures.


This cost, of course, must be added to
the cost of futures trading when
deciding if buying an option is worth
what is effectively an insurance
premium.


For those who avoid a devastatingly bad
move in the futures market of a
commodity the insurance will be worth
it.


They will not have entered a bad
position and they will not have paid to
buy or sell a futures contract.


For those who are trading in stable
markets the cost may not be worth it as
a trader can always get out of a futures
position by buying back an equivalent
futures contract or selling a contract
equivalent to what he or she previously
bought.


The use of the commodity futures
equivalent calculation can be helpful in
deciding whether to trade futures or
options on futures.


Commodity Futures Equivalent

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