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Futures options are another type of investment that adds another level of complexity to futures contracts. Whereas futures allows an investor to simply buy or sell a contract to make or take delivery of a commodity, options trading gives an investor an option to buy or sell a specific futures contract to make or take delivery of a identified commodity at a set price in the future. These options allow traders to respond to market changes. Specifically, a call option gives an investor the right (but not the obligation) to buy a futures contract, called the strike price. A put option gives them the right (but not the obligation) to sell a future contract. The price paid for the option is the strike price and is independent of the futures contract price. If this seems confusing, that's because it is. Many financial professional advise that individual investors, especially inexperienced ones, stay away from options investing entirely. Futures options are primarily used for two purposes: speculation and hedging. Both come with unique sets of benefits and potential risks. Speculation with futures options is essentially the same as speculating on any other security, with one big difference. With a normal speculative investment, you are simply betting that the price of a security will rise. With a futures option, you are projecting that the price of a commodity will rise or fall in excess of the option strike price within a specific time period. This makes this type of speculation incredibly difficult. Unlike other investments, options have a limited life and most expire without being exercised. Investors do not own anything but a right to buy or sell for a limited period of time. Hedging, the other use for futures options, is considerably less risky. Essentially, hedging through futures options is an insurance policy for your current investments. You could, for example, purchase a put option such that you could sell off your investment and minimize your losses in the event of an unexpected drop in that asset's price. If you've decided to purchase futures options, you can likely do so with your current broker. Many online brokerages offer futures options trading. Be sure to check with your broker to be sure that you stay in line with any specific requirements for options trading. Even though put options require that you sell a commodity contract, you don't necessarily have to own this contract to buy the option. Most options calls or puts are not exercised by the original purchaser who simply sells the option on or before its expiration date to close out the position with a profit or loss.
Learn about futures options. Understand the risk and benefits of futures options. Purchase futures options.