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Introduction to Options

Since 1987, the New York Mercantile Exchange has introduced options contracts on all of the Energy Futures. The flexibility of these contracts has ensured their continued success in years to come.

Options Benefits

The value of the options market to both hedgers and speculators can not be understated. For example:

  • Options provide hedgers with the ability to hedge cash and futures positions against adverse price fluctuations, while still allowing for profit on favorable price swings.
  • Options offer the availability of hedging insurance at many different levels of cost and degrees of protection.
  • Options provide a host of complex strategies that can be used alone, or in combination with futures contracts. They can be tailored to fit any risk profile, time horizon, or cost consideration.
  • In contrast to futures, there are no margin calls for option buyers. If the market moves against a position, and a trader holds on to his option, the maximum loss is the amount he paid for the option. Conversely, if the market moves in a traders favor, the unlimited profit potential of an option can ultimately parallel that of a futures position.
  • With the exception of the spot month, futures contracts are subject to limits on daily price movements. However, there are no restrictions on how much fluctuation there can be on an options contract. Therefore, options may be traded during times of extreme volatility when futures contracts are locked limit and unable to trade.

Options Defined

Simply stated, a participant who buys an option is given the right, but not the obligation, to require the seller (writer) to perform according to the provisions stated in the contract. Options are segregated by calls and puts, contract month, and strike price.

Calls and Puts

There are two types of options: calls and puts. Both are traded in the first six months of the underlying futures contract.

  • A call option is a contract that gives the buyer the right but not the obligation to buy a fixed number of futures contracts at a fixed price at any time on or before a fixed date.
  • A put option is a contract that gives the buyer the right but not the obligation to sell a fixed number of futures contracts at a fixed price at any time on or before a fixed date.
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