Options on Futures
Every option strategy on the exam is built from four positions — long call, short call, long put, short put — and three numbers: strike, premium and futures price.
Rights, obligations and value
An option buyer pays a premium for a right with no obligation; the writer receives the premium and must perform if assigned. A call is in the money when the futures price is above the strike; a put when the futures price is below it. Premium equals intrinsic value plus time value, and time value is larger the more time remains until expiration.
Risk profiles and break-evens
A buyer's maximum loss is the premium plus costs. An uncovered call writer's risk is open-ended. A call breaks even at strike plus premium; a put at strike minus premium. A hedger buying a put gets a floor of strike minus premium plus basis; a hedger buying a call gets a ceiling of strike plus premium plus basis.
Where to go deeper
The PrepPass Series 3 Study Guide covers covered calls, synthetic positions, bull and bear call and put spreads with maximum profit and loss, straddles, strangles, calendar spreads and conversions, each with worked examples and practice items.
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