Futures & Options

A futures contract is a binding agreement to buy or sell an asset at a set price on a specific future date. It's standardized (fixed size and expiry), leveraged (you control a large position with a small amount of capital), marked-to-market daily, and generally liquid.

Why traders use futures:

• Hedging against price changes in an underlying asset.
• Leverage — controlling a large position with a fraction of the capital.
• Profiting from price moves without ever owning the underlying asset.

An option is the right, not the obligation, to buy or sell an asset at a set price before expiry.

The strike price is the predetermined price you can buy or sell at. For a call option:

• In the money (ITM) — current price above strike (e.g. AAPL at $160, $155 call). Already has intrinsic value, higher premium, lower risk.
• At the money (ATM) — current price ≈ strike. Maximum leverage opportunity, medium premium and risk.
• Out of the money (OTM) — current price below strike. Pure time value, cheap premium, higher risk.

Bullish traders typically buy lower-strike calls for more upside; bearish traders buy higher-strike puts for more downside exposure.

An option's premium decays as expiry approaches — a phenomenon known as theta. A $150 call trading at $5.00 with 60 days left might be worth $3.50 after 30 days, $1.00 with a day left, and $0 if it expires out of the money. Decay accelerates hardest in the final days.

Volatility (vega) works the other way — higher volatility means higher premiums, because bigger potential price swings mean bigger potential profit. A common approach: sell options when volatility is high (premiums are rich), buy when it's low (premiums are cheap).

• Never risk more than 1–2% of your account on a single trade.
• Always use stop-loss orders.
• Avoid holding through earnings reports — volatility spikes.
• Start by buying options (limited, known risk) before selling them (unlimited risk).
• Diversify across multiple underlyings.
• Close positions before expiry rather than letting them run out.

• Over-leveraging — using excessive margin gets accounts wiped out fast. Risk only 1–2% per trade.
• Holding through expiry — value evaporates in the final days. Close 1–2 weeks out.
• Ignoring time decay — check the Greeks (delta, theta, vega) before entering.
• Selling covered calls too close to the current price — the stock gets called away for a small profit. Sell 10–20% above market.
• No stop-losses — one bad trade can erase an account. Set a stop at roughly 2x the premium paid.
• Trading illiquid contracts — wide bid-ask spreads eat into profit. Stick to contracts with real daily volume.

• Futures are leveraged contracts with daily settlement.
• Options give you the right, not obligation, to buy or sell — with defined risk if you're buying.
• Calls profit on the way up, puts profit on the way down.
• Strike price determines moneyness (ITM/ATM/OTM).
• Time decay erodes option value daily, especially near expiry.
• Leverage amplifies gains and losses equally.
• Risk management matters more than any individual strategy — trade only with money you can afford to lose.