Most deep out of the money options will expire worthlessly, and they are considered long shots. To maximize your leverage and control your risk, you should have an idea of what type of move you expect from the commodity or futures market. The more conservative approach is usually to buy in the money options. A more aggressive approach is to buy multiple contracts of out of the money options. Your returns will increase with multiple contracts of out-of-the-money options if the market makes a large move higher. Your losses on buying a call option are limited to the premium you paid for the option plus commissions and any fees.

With a futures contract, you have virtually unlimited loss potential.

Call options also do not move as quickly as futures contracts unless they are deep in the money. This allows a commodity trader to ride out many of the ups and downs in the markets that might force a trader to close a futures contract in order to limit risk. One of the major drawbacks to buying options is the fact that options lose time value every day.

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Options are a wasting asset. You not only have to be correct regarding the direction of the market but also on the timing of the move. This formula is used at option expiration considering there is no time value left on the call options. You can obviously sell the options anytime before expiration and there will be time premium remaining unless the options are deep in the money or far out of the money. A call option can also serve as a limited-risk stop-loss instrument for a short position.

In volatile markets, it is advisable for traders and investors to use stops against risk positions. A stop is a function of risk-reward, and as the most successful market participants know, you should never risk more than you are looking to make on any investment. The problem with stops is that sometimes the market can trade to a level that triggers a stop and then reverse. For those with short positions, a long call option serves as stop-loss protection, but it can give you more time than a stop that closes the position when it trades to the risk level.

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That is because if the option has time left if the market becomes volatile, the call option serves two purposes. Markets often rise only to turn around and fall dramatically after the price triggers stop orders. As long as the option still has time until expiration, the call option will keep a market participant in a short position and allow them to survive a volatile period that eventually returns to a downtrend.

A short position together with a long call is essentially the same as a long put position, which has limited risk. Call options are instruments that can be employed to position directly in a market to bet that the price will appreciate or to protect an existing short position from an adverse price move.

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The Options Industry Council. Table of Contents Expand.

Table of Contents. Find the Proper Call Options to Buy. Duration of Time on Call Option. Amount You Can Allocate to Buying. Expected Length of Market Move.

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Call Options vs. Break Even Point on Call Options. Past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. Firstrade is a discount broker that provides self-directed investors with brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. Options trading involves risk and is not suitable for all investors. Options trading privileges are subject to Firstrade review and approval. Please review the Characteristics and Risks of Standardized Options brochure and the Supplement before you begin trading options.

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