Futures and Options Markets

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Open interest also known as open contracts or open commitments refers to the total number of outstanding derivative contracts that have not been settled offset by delivery. For each buyer of a futures contract there must be a seller. Share trading future and options the time the buyer or share trading future and options opens the contract until the counter-party closes it, that contract is considered 'open'.

Many [ citation needed ] technical analysts believe that a knowledge of open interest can prove useful toward the share trading future and options of major market moves. For some [ citation needed ] option traders, open interest indicates the intensity of trading in a financial instrument. If open interest increases suddenly, it is likely [ citation needed ] that new information about the underlying security has been revealed, which may indicate a near-term rise in the underlying security's volatility.

However, neither an increase in volatility nor open interest necessarily indicate anything about the direction of future price movements. A leveling off of open interest following a sustained price advance is often [ citation needed ] an early warning of the end to an uptrending or bull market. Technical analysts view [ citation needed ] increasing open interest as an indication that new money is flowing into the marketplace.

From this assumption, one could conclude that the present trend will continue. Analogously, declining open interest implies that the market is liquidating, and suggests that the prevailing price trend is coming to an end. A common misconception is that open interest is the same thing as the number of option contracts traded.

The difference between the two can be explained with a short scenario here. Further, according to the definition of open interest in this entry, a change in open interest indicates a difference in the number of buyers and sellers of a financial instrument, or at a minimum an increase or decrease in the size of participants' positions. Like volatility, it has no directional component, it is just a tally of unsettled contracts. For example, if trader X buys 2 futures contracts from trader Y who is the sellerthen open interest rises by 2.

If another trader A buys 2 futures contracts from trader B, then the open interest rises to 4. Now, if trader X unwinds his position share trading future and options the counter party is either Y or B, then the open interest in the system will reduce by that quantity.

But if X unwinds his position, and the counter party is a new entrant, say C, then the open interest will remain unchanged. The level of outstanding positions in the derivatives segment is one of the parameters widely tracked by the market. One complication involved when looking at the overall level of open interest in a share trading future and options market is the impact of deliveries.

In a physically-delivered commodity, when delivery ultimately takes place the contract that has been delivered share trading future and options no longer included in the overall open interest tally. Open interest provide useful information that share trading future and options be considered when entering an option position.

First, let's look at exactly what open interest represents. Unlike stock trading, in which there is a fixed number of shares to be traded, option trading can involve the creation of a new option contract when a trade is placed. Open interest will tell you the total number of option contracts that are currently open—in other words, contracts that have been traded but not yet liquidated by either an offsetting trade or an exercise or assignment.

For example, say we look at Microsoft and open interest tells us that there have been 81, options opened for the March You may be wondering if that number refers to options bought or sold. The answer is that you have no way to know for sure how many transactions have taken place but you do know that there are 81, options share trading future and options that remain open. Since there is 1 bought position and 1 sold position for each of these contracts, there are 81, positions that remain bought to 'open' and 81, positions that remain sold to 'open' for the March There are always the same number of positions on either side of the open transactions.

So, when an option is traded with one party opening and one party closing, the open interest remains unchanged. If both parties in the transaction are closing positions then the open interest decreases accordingly. If both parties are opening positions then the open interest goes up accordingly. Share trading future and options way to use open interest is to look at it relative to the volume of contracts traded. When the volume exceeds the existing open interest on a given day, this suggests that trading in that option was share trading future and options high that day.

Open interest can help you determine whether there is unusually high or low volume for any particular option. Open interest also gives you key information regarding the liquidity of an option. If there is no open interest for an option, there is no secondary market for that option. When options have large open interest, it means they have a large number of buyers and sellers, and an active secondary market will increase the odds of getting option orders filled at good prices.

So, all other things being equal, the bigger the open interest, the easier it will be to trade that option at a reasonable spread between the bid and ask. Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend up, down or sideways share trading future and options continue. Declining share trading future and options interest means that the market is liquidating and implies that the prevailing price trend is coming to an end.

A knowledge of open interest can prove useful toward the end of major market moves. A leveling off of open interest following a sustained price advance is often an early warning of the end to an uptrending or bull market. An increase in open interest along with an increase in price is said [ citation needed ] to confirm an upward trend. Similarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal.

The relationship between the prevailing price trend and open share trading future and options can be summarized by the following table: From Wikipedia, the free encyclopedia. This article contains weasel words: Such statements should be clarified or removed. This article's tone or style may not reflect the encyclopedic tone used on Wikipedia.

See Wikipedia's guide to writing better articles for suggestions. November Learn how and when to remove this template message. Fundamentals of the futures market. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Derivatives finance Technical analysis. Articles with weasel words from December All articles with unsourced statements Articles with unsourced statements from December Wikipedia articles needing style editing from November All articles needing style editing Articles with unsourced statements from November Articles with Italian-language external links.

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Futures Options are financial contracts that are often overlooked by traders, but due to their unique characteristics, the advantages of options trading might be worth looking into.

As a trader you can utilize futures options as a trading tool for a long term outlook on physical Gold, Crude Oil, etc and financial futures Stock Indicies, Bonds, etc. The buyer of an option has the right, but not the obligation in contrast to futures and spot trading , to buy or sell the underlying asset such as a commodity or a stock at a certain price on, or before a certain date.

The buyer of the option pays a fee for the option the premium to the seller. The strike price of the option is the price at which the option can be exercised at. Options have an expiration date, which means that if they are not exercised before a certain date, they expire worthless. The upside potential for buying call options is, therefore, unlimited theoretically , whereas the potential loss is limited.

The 4 basic scenarios when buying and selling put or call options are displayed in the following table. There are 5 major benefits of trading options, which could help traders overcome the most common problems when trading futures or spot. The potential losses when buying calls and buying puts are limited to the premium paid, whereas the upside is almost unlimited when buying calls and puts.

A common problem among futures traders is that they do not use stop loss orders, use mental stops that are not executed with discipline, or continuously widen their stop loss order when the trade goes against them.

When buying options, the risk is predetermined and it is limited to the premium paid. If you have bought a call or a put, volatility only has a limited impact and, especially important, your option will remain valid even if the price moves against you substantially; the greatest limiting factor in options trading is time.

This advantage is a consequence of the previous point. Often, traders are better at picking the broad market direction, but their timing and their stop loss placement is off, which then results in unprofitable trades although they can see that price eventually made it to their initial take profit. When buying options, the entry timing of trades has a smaller impact and the influence of stop loss orders is not present at all, but knowing the broad direction is more important.

Revenge and over-trading are among the most commonly made emotionally caused trading mistakes and they are the result of inferior coping mechanisms when it comes to realizing losses. Traders often personalize losses and after a loss still believe that their trade idea is right, which then causes them to open another trade, often without valid entry criteria and purely based on impulsive reactions. When buying options, the impacts of stop loss orders are removed because the only thing that determines whether you lose or make money, is the price of the underlying asset when the option expires.

During an options trade, you do not get direct negative feedback about your position which can potentially remove the impacts of emotionally caused trading decisions to some degree.

Due to the unique characteristics of options and the way their payoff is structured, different types of option contracts can be combined to capitalize on very specific market behavior. Whereas a futures trader is limited to either trade with buy or sell orders, an options trader can choose from a variety of scenarios and, therefore, tailor his trading methodology around his personal needs, his investing perspective and the trading tools used.

If you want to know more, Optimus maintains a wide selection of online commodities trading platforms to help you become an effective trader. Or contact one of our friendly staff to talk about your needs and we help you find the best solution for you! Optimus Futures is a leading online futures broker that caters to traders seeking fast execution and stable data feeds combined with aggressive margins and deep discount commissions.

Focus on Factors in Your Control. About Optimus Futures Optimus Futures is a leading online futures broker that caters to traders seeking fast execution and stable data feeds combined with aggressive margins and deep discount commissions.