The Fundamentals of Options and Futures and Simple Strategies for a New Trader

Abstract

The purpose of this paper is to present a basic understanding of the complex ideas and concepts used in options strategy. Hedgers and speculators bid and compete in open outcry pits and over electronic exchanges, and the volatility present in commodities markets provides the opportunity for profit to be made on mispriced options. The prospect of limited risk and unlimited reward makes options extremely valuable, but careful monitoring of volatility and other market factors determine the accurate theoretical price. An introduction to options and futures and a basic understanding of tools and strategies used by hedgers and speculators is essential to success in these exchanges. With first hand experience as a commodities options clerk using real-world examples, I will cover a brief history of options functions, terminology, strategies, and a brief discussion of a theoretical option pricing model. The following is a brief summation of my internship and the fundamentals of options and futures trading.