Alex Groberman, CIM, DMS, FCSI
Futures and Equities Advisor,
Options Specialist

Options and Futures: A Primer

(New to options and futures? Take a look at my learning resources, or contact me for more info.)

Derivatives can fine-tune your investments to better reflect your market outlook. But without really understanding the many factors which affect their values, options and futures can be unpredictable investments.

How do you choose the right strategy?

To answer this question, we need to do two things. First, we need to gather the necessary information, and then we need to translate that information into useful trading ideas.

This necessary information falls into two categories: trade objectives (Goals), and data surrounding the stock, commodity, or index (Market Factors):

Goals

What is my price target for the stock, commodity, or index?

What is my anticipated time frame for the trade?

What are my tolerances for risk and for capital requirements?

Do I have an outlook on the volatility (degree of price fluctuation) of the underlying asset?

What is my motivation: to generate profit, or to mitigate risk?

Are there any special tax considerations, such as unrealized profits on stocks that I own?

Market Factors

Liquidity and availability of derivatives

Dividends or distributions on the underlying asset

Upcoming news releases which could affect price or volatility

Implied volatility of options (Are options particularly "cheap" or "expensive"?)

Futures cost of carry (storage and insurance fees, interest rates, or seasonality)

Execution method (electronic or trading floor, choice of exchange, and other considerations)

So how do you gather this information quickly and accurately, and how do you turn it into viable trading ideas?