One may be interested in buying or selling call or put options for a number of reasons.
A bullish move would be to buy call option because he or she thinks the price of the contracts will rise. If the price does rise the buyer of the option has three possible options. There will be transaction fees and commissions associated with the purchase of an options contract. These will have to be included when assessing risk and costs.
The buyer could exercise the option when it is in the money and retain the resulting futures market position. The buyer could sell the option to close the position. The buyer could exercise an in the money option into a futures position which they immediately offset with a futures transaction. There is substantial risk of loss in futures trading. Options may not move in lockstep with futures price movements. There will be transaction fees and commissions associated with the purchase of an options contract.
Prices may not rise and the buyer would lose premium paid and fees and commissions.
A seller of call options believes in their mind that bond futures will have little movement or a slight decline. The aim is to have the option expire worthless so the seller can collect premium, minus commissions and fees. The drawback to this kind of transaction is the unlimited risk exposure as the seller has to assume to opposite side of the futures transaction if the option is exercised.
The person who buys a put option thinks that the futures contract will lose value. If a person buys a bond future put option at a strike price of 103 for 3.00, while the bond is 103, the put option will be in the money for the buyer if the bond falls below 100. The risk of loss is the premium paid plus commissions and fees.
Many institutions use puts for insurance purposes if one is long an abundant amount of cash or bond futures. For example, if an institution is long bonds at 103 and a T-bond put option with a strike price of 103 is purchased for 3.00, this contract could go to zero in theory. The put option holder has the option of exercising the contract at 103, if the option hasn't expired.
Those who sell put option on bond futures or fixed income products feel that interest rates may stay the same or decline in value. The seller of these put options will receive income. If rates happen to rise the person who buys the bond option exercises and the seller is assigned the opposite side of the transaction. Short options are a position with unlimited risk.
Bond futures and options trading carry the risk of substantial loss. Click here to register for our free report that can help you understand bond futures trading.
