What are known as put and call options are traded on most active futures contracts. The principal attraction of buying options is that they make it possible to speculate on increasing or decreasing futures prices with a known and limited risk. The most that the buyer of an option can lose is the cost of purchasing the option (known as the option “premium”) plus transaction costs.
Options can be most easily understood when call options and put options are considered separately, because they are totally separate and distinct. Buying or selling a call in no way involves a put, and buying or selling a put in no way involves a call.
Reprinted with permission from the National Futures Association. Copyright 2002.