By Michael Griffis, Lita Epstein. All types of options and futures are traded on a commodities exchange. In addition, some types of options can be traded on stock exchanges. There are two options. Treasuries; foreign currencies; and spot gold futures. You can trade stock options and some index options in a traditional stock account. Special risk-release forms must be signed, but otherwise, the account remains the same. Naked short positions require a margin account. If you want to buy futures or options on futures, you must do so through an individual account that you open with a registered futures commission merchant FCM or through your broker.
Your broker transmits any transactions through an FCM as an introducing broker. You have to deposit them directly with the FCM. You have the choice of opening either a discretionary account or a nondiscretionary account. A discretionary account is an account in which you sign a power of attorney over to either your FCM, your broker, or a commodity trading advisor CTA so he or she can make trading decisions on your behalf.
A nondiscretionary account is an account in which you make all the trading decisions. You also may want to consider trading through a commodity pool. When trading through a commodity pool, you purchase a share or interest in a pool of other investors, and trades are executed by an FCM or CTA. Any profits or losses are shared proportionately by the members of the pool.
When you open an individual account, you need to make a deposit that amounts to a margin payment or performance bond for the futures you trade.
This payment is relatively small compared to the size of your potential market position, and it gives you the opportunity to greatly leverage your money. Small changes in options and futures prices can result in large gains or losses in short periods of time. If your positions are liquidated at a loss, you can be held liable for that loss, which sometimes can be substantially more than your original margin deposit.
With those three details in hand, you can determine a break-even price for a call option using this formula:. These calculations are correct only when your broker has one fee for a round-trip option exchange. If you have to pay fees in both directions, which is common, then you need to double the fee in the calculation. Most brokers do charge fees in both directions. The fees are the same in each direction, so the cost for trading would be double.
When calculating the break-even price for a put option, you subtract the premium, commission, and transaction costs.
How to Trade Options and Futures Contracts.More...