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Large Moves with Limited Risk

In markets like oil, gold and silver, you can see swings of over 2% in one day. These markets may offer great set ups for someone who likes to trade volatility, but may seem like too large a swing in price for other traders.

One way to participate in these markets without as much exposure is to trade the option. As an options on futures trader, you can still be involved in the same large move but risk less if the market moves against you by purchasing a put or call or trading a spread. An options buyer is only risking the amount paid for the trade, otherwise known as the premium.

If the E-mini NASDAQ 100 future (NQ) is trading at 5,022, a trader could buy a 5,020 call in NQ that expires in four days, costing around 24 points.

Assume at the time, the 14-day Average True Range (ATR) for the NQ is around 50. Using the ATR as a guide, a move of 25 points up or down each day on average is expected. Buying the NQ call would allow an options on futures buyer the ability to stay in a trade while only risking one day’s move, but with four days of possibility for the trade to profit.

Even though the futures contract might have a large move, which could potentially have unlimited risk, the options buyer of a call or put is only risking what she/he paid for their option. While the price of options is always fluctuating based on the underlying, the options on futures trader knows their risk exposure because they have only risked what they paid.

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