Trading in Options on Futures

Abstract

Two traders were bullish on the stock market. The first translated his market opinion into a purchase of S&P 500 futures. The second bought slightly out-of-the-money call options instead. The market moved immediately lower. The futures trader began to feel heat as prices moved downward. Soon, he had to liquidate because the losses and potential losses were too great. The options trader was secure in the knowledge that no mater how low prices went, the trade would lose no more than the original premium paid up front. Prices began to rally. The futures trader had lost some confidence and did not establish new long positions. The options trader was able to participate in the market rally.