A Few Things You Should Know Before You Trade Options

BusinessmanOne of the questions that frequently comes up with option traders who have only done the equity side of options is how do I get into trading futures options and what do I need to know before I start?  There are several basic things you should know and understand about futures and their option before you get started with live trading of them.

What month should I trade?

One of the first characteristics to consider is that futures do not always have a new contract every month. Many futures, U. S. Treasury bonds for instance, have only a few contract months per year. Treasuries have March, June, September   and December only. All the months in between have options only that are traded derivative of the next futures month. Strategies, such as time spreads must be placed carefully to insure that you are trading off the same underlying contract month. Get to know your futures and options expiration periods before you start.  Not only the contract months differ from the equity world, trading hours do also so be sure to know when your underlying is being traded during the day and night.

What is the tick size?

Tick size for the different futures and options is different than many equities also. And the tick size of the options and the future itself can be different. Using the bond example again, the future tick size is $31.25 per tick and the options are $15.625 per tick. Futures trading can be larger and highly leveraged, it is important to understand how each tick movement is effecting your position.

What type of strategy should I trade?

Once you have a basic understanding of the future and its options you wish to trade you can begin to look at what strategies to employ.  Non-directional or directional strategies such as iron condors and calendars can be used but be careful with the time spreads that you are using the same underlying contract month as I mentioned earlier. From my own experience it seems iron condors either even on each side or sometimes weighted heavier on one side or the other can be a solid month-to-month trade.  Sometimes short or long straddles can be appropriate also.

Don’t trade without a PLAN!

Having a PLAN is the most important part of trading any underlying, whether you trade futures or equities. Before you enter any trade you should know and have a plan for how and when you will exit the trade at a profit or a loss and at what point you would adjust or reduce risk a trade that is going against you. In my experience mentoring new traders that is the most common mistake I see being made. You must also stick with your plan and try to control the emotions that would have you staying too long or not long enough in a trade. Your trading PLAN is fundamental.  Don’t trade anything without one.

If you follow these steps, you should have a good start to learning how to trade futures and futures options.  Trading always involves risk; learn to control it as best you can.

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