Commodity Futures Trading Blog

Commodity Brokers Want Futures Trading Investors to Understand Why so Many Options Purchases Lose Money

Port St. Lucie, FL (PRWEB) August 20, 2006

T & K Futures believes that the two greatest enemies for futures traders who are option buying investors, besides themselves, are time decay and volatility premium. It amazes the company that many people have never heard of these key components of option value. Options are by their very nature a wasting asset. Given a flat market scenario, they lose premium value daily. The only way for an option purchaser to make money is for the value of the option premium to increase more relative to the time decay of that option.

What is volatility premium? When one buys and option (call/put), they are buying the right to buy or sell from an option grantor. They collect the premium that one pays for the option. They hope that the person loses because if that happens they win. This is the whole zero sum investment thing people have heard about. The option grantor takes on the lion’s share of the financial risk because while people are only liable for the premium that one pays for the option they are liable for the value of the contract.

So they increase the price of the option premium to offset their risk relative the volatility of the market. The more price movement in the futures market where people purchase an option, the more volatility risk the grantor is taking. In other words, the chances to reach strike price objectives are more attainable so the grantor charges more.

Past performance is not indicative of future results. Futures trading and option investments are risky and people can lose money. Use only risk capital when investing in futures or options.

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