Finding the right strategies for future option trading depends on whether you are hedging or speculating. Hedgers are relying on investment strategies that will minimize risk of loss. Speculators want to maximize profits and will take risks in order to do so.
Hedging in Future Option Trading Guide
Hedging is a process whereby you offset the risk of a price failing to perform as expected by implementing a position in the option market that is opposite to the original transaction. For example, you may buy calls and puts. When you are working both sides of the price potential the risk is of maximum loss is “hedged” or minimized.
When you hedge in future option trading, you are assuming a balanced investment or a neutral position. A loss on one side is reduced or eliminated by a gain on the other. Obviously it is necessary to maintain the right ratio between the two options by relying on an analysis of the deltas of the options.
Speculating on Profits
Speculators in options try to make as much money as possible and are willing to use riskier strategies to do so. While the hedger is trying to maintain the appropriate ratio between the two options so that risk is minimized, the speculator does not focus on transaction balancing. The future option trading speculator will use strategies that are aggressive and have unlimited risk. On the other hand, the strategy chosen, like the risk reversal spread, can also have unlimited profit potential.
Speculation in future option trading should only be undertaken after you have gained experience in the options market.