Introduction to

Options Trading Guide

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Table of Contents

Options Basics......................................................................................................................................... 4
Options Pricing......................................................................................................................................... 6
Reading Options Quotes......................................................................................................................... 8
Basic Options Trading Strategies........................................................................................................... 9
Quiz Yourself on Options....................................................................................................................... 11
More Information and Additional Resources....................................................................................... 15

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complete and it should be relied upon as such. Trading advice reflects our good faith judgment at a specific time and
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results.
Introduction

Thank you for your interest in RJO Futures’ Introduction to Options Guide.

Options offer several different ways for an investor to explore and take advantage of
opportunties in price movements in commodities, foreign currencies, stocks, and interest
rates through versatitly, leverage, limited risk, and hedging.

Although the buyer of an option does have the advantage of a predetermined maximum
risk (or “premium”), he or she is still risking 100% of an investment. Options are not
suitable for all investors, and you should work with an RJO Futures Sr. Trading Advisor
to determine if they are right for you. And as with any other speculative investment, the
options investor should be aware of the risks and rewards before investing.

This guide is only an introduction to options trading. It is not intended to be an

all-inclusive manual to the many different strategies available in options trading. A more
in-depth explanation of strategies can be found in our upcoming Options Strategy Guide.
Please keep an eye on www.rjofutures.com for more information on when the guide will
be available.

Regards,
RJO Futures Sr. Trading Advisors
Phone: 800-441-1616 or 312-373-5478
Email: info@rjofutures.com
Options Basics
History of Options
The standard definition of options is that they are
contractual agreements that provide the right, but
not the obligation, for the buying or selling of an
underlying asset at a certain date at a set price. The
premium is the price paid for that right.
Initially, they were traded in an over-the-counter
market, with each contract having unique terms. It
was up to buyers and sellers to find each other, and
they did so via newspaper ads.
In the late 1960s, Joseph W. Sullivan, vice president
of planning for the Chicago Board of Trade (CBOT)
proposed standardizing strike price, expiration, size,
and other contract terms.
The CBOT established the Chicago Board Options
Exchange and started trading listed call options
on 16 stocks on April 26, 1973. Put trading was
introduced in 1977.
And although futures contracts have been traded
on U.S. exchanges since 1865, options on futures
contracts were not introduced until October 1982,
when the Chicago Board of Trade began trading
options on U.S. Treasury Bond futures.
What are Options?
There are two types of options:
Calls. These give the holder the right, but not the
obligation, to buy (“go long”) an asset at a certain
price within a certain period of time.
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Puts. These give the buyer the right, but not the
obligation, to sell (“go short”) the underlying futures
market at a stated price (“the strike price”), prior to
option expiration.
Generally speaking, if you think the asset price is
going down, you would buy a put. And if you think
the price is going up, you would buy a call.
And there are basically three ways that options can
be liquidated to make a profit or avoid loss:
Exercising. By choosing to take delivery of (call) or
sell (put) the underlying asset at the option’s strike
price, a trader is “exercising” an option.
Offsetting. This reverses the original transaction to
exit the trade. In other words, a buyer of an option
would sell it to liquidate, while the writer of an option
would buy it back to liquidate.
Expiration. If an option is not offset or exercised,
it eventually expires. The buyer then loses the pre-
mium paid, while the writer profits by the premium
paid (minus commissions and fees).
Let’s say you think gold is going to go up, and the
September gold futures contract is $310 per ounce.
You buy a call option with a strike price of $330. Gold
futures control 100 ounces, and the call option is $5
per troy ounce—so the premium you pay is therefore
$500. You are considered the buyer or holder in the
transaction and the entity you purchase the contract
from is the writer.
From there, your next move is affected by whether
the price goes up or down.
 If the Price Goes Up If the Price Goes Down

Now let’s say the price of gold rises to $350. Now let’s say the price of gold falls to $300. You
You can exercise the call (purchase the gold) at are under no further obligation, and you can simply
the $330 strike price, even though the price has let the option reach expiration. Your loss would be:
increased. Your profit would be:

The current futures price $350 Premium paid $5 per oz x 100 oz = $500
Minus the strike price $330
$20

Minus the premium paid $5 per oz

Profit $15 x 100 oz = $1,500

Retail traders tend to be more familiar with buying
options, which lets you know the risk up front. But
selling options can give you opportunities to profit
even when the option expires worthless or decreases
in value—which occurs most of the time.
The chart at bottom takes a look at some of their
other differences.
Potential for higher returns. By the same token,
since you are spending less and potentially making
the same profit, you are getting a higher return on
your investment.
But such benefits don’t mean that options are entirely
without risk. You have to get direction, time frame,
and amount of move right in order to profit.

Options are often used for as insurance against drop-

ping prices, but they can also have other benefits.

Leveraging power. Options allow you to fix the

price, for a specific period of time, at which you can
purchase the asset. And the premium paid is only
a small percentage of the value of the underlying
futures contract—giving options traders leverage.
Risk management. Because they require less finan-
cial commitment, options can also be less risky.

Buying Options (Long) Selling Options (Short)

Profits are gained in option puts only in falling Profits can be gained by option puts sellers in flat to
markets. rising markets.

Profits are gained in option calls only in rising Profits can be gained by option call sellers in flat to
markets. falling markets.

The maximum gain can be unlimited for bought calls. The maximum gain is the total of the premiums
received for selling short options.
Maximum gain for bought puts can also be
significant.

The maximum potential loss for long options is all of The maximum loss can be unlimited, although
the premiums that were paid. margins can help contain them.

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Options Pricing
First, let’s review some previously discussed options
terminology: Options, by definition, give buyers the
“option” or right to buy or sell an underlying futures
contract—but not the obligation. A call option gives
the buyer the right to go long (buy) the underlying
futures market at a stated price (“the strike price”),
anytime prior to option expiration. And a put op-
tion gives the buyer the right to go short (sell) the
underlying futures market at the strike price, anytime
prior to option expiration.
In addition to the type of option (put or call) and the
current price of the underlying financial instrument,
options premium pricing can be affected by the
underlying futures market’s relation to:
Time value. This is the portion of the option premium
attributable to the amount of time remaining until
the expiration of the option contract. In general, the
longer the amount of time until an option’s expiration,
the greater the time value.
Volatility. This is the amount of price movement in
the underlying market over time. Prices that experi-
ence large swings up and/or down mean greater risk
and potential reward—and therefore also mean a
higher price on the option.
Strike price. Also called the “exercise price,” this
is the price at which the futures contract underlying
a call can be exercised—and it is considered the
biggest factor in determining the price of an option.
Call options with a strike price below the current
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price of underlying futures contracts are said to have
intrinsic value. Put options with a strike price above
the current price of the underlying futures contract
also have intrinsic value.
Intrinsic value is the difference between the un-
derlying stock’s price and the strike price—or the
in-the-money portion of the option’s premium. So if
a call options strike price is $25 and the underlying
stock’s market price is at $35, then the intrinsic value
of the call option is $10.
For a better understanding of intrinsic value, traders
should look at what it means to be in the money, at
the money, and out of the money.
In the money. The Great Depression era song,
“We’re in the Money” is rumored to be a referral to
this term, which means that options have achieved
strike price. A call option is in the money if the strike
price is below the price of the underlying futures. A
put option is in the money if the strike price is above
the price of the underlying futures. In-the-money
options have positive intrinsic and time value.
A September soybeans 600 call option is in the money if the underlying
futures market is above 600. If the futures market is at 620, the option
is in the money by 20 cents.
At the money. An option is at the money if the strike For both the buyer and writer of a put, the break-
price is at the same price as the underlying futures, even point is also the same. And if the futures price
and only has time value—no intrinsic value. is below break even, it means a profit for the buyer
of a put option and a loss for the writer of the put
option.
The same September soybeans 600 call option is at the money if the

underlying futures market is at 600.
Strike Price - Premium - Commission and
Fees = Break Even
Out of the money. Out of the money means an
option would basically be worthless if it expired on
the day in question. A call option is out of the money
if the strike price is above the price of the underlying
futures. A put option is out of the money if the strike
price is below the price of the underlying futures.
Out-of-the-money options also have no intrinsic
value.

The September soybeans 600 call option is out of the money if the
underlying futures market is below 600. If the futures market is at 580,
the option is out of the money by 20 cents.

Call Option Put Option

In the money Futures > Strike Futures < Strike

At the money Futures = Strike Futures = Strike

Out of the money Futures < Strike Futures > Strike

Options traders also look at the break-even point

in their trading. Break even is the price at which an
option’s cost is equal to the proceeds acquired by
exercising the option.

For both the buyer and writer of a call, the break

even is the same. And if the futures price is above
break even, it means a profit for the buyer of the call
option and a loss for the writer of the call option:

Strike Price + Premium + Commission and

Fees = Break Even

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Reading Options Quotes

Following is an EXAMPLE of what a typical option quotes chart looks like, as well as how to read it:

1 2 3 4 5 6 7 8 9 10 11

Type Symbol Strike Open High Low Last Chg Prev. Settle Open Interest DTE

Call ES Q8C970 9700 28750 28750 28750 28750 -180300 209050 1 25

Put ES Q8P850 8500 10 10 10 10 5 5 162 25

1. Type: Calls and Puts. These give the holder a right, 6. Low: Shows the lowest price that the options traded
but not the obligation to buy (“go long”) or sell (“go at on this day.
short”) the underlying futures market at a stated
price (“the strike price”), prior to option expiration. 7. Last: The most recent trading price for the option—
updated online several times an hour and in the
2. Symbol: This includes the symbol for the newspaper daily.
commodity, the symbol for the expiration month, and
the strike price. 8. Chg (Change): Change in the price of the option,
compared to the previous day’s closing price.
3. Strike: The strike price (or exercise price) of
an option. 9. Previous Settle: The closing price of the contracts
for the previous day.
4. Open: The price that the option opened at on the
trading day. 11. DTE (Date Till Expiration): Number of days until
the expiration of this option.
5. High: Shows the highest price that the options
traded at on this day.

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Basic Options Trading Strategies
Options can provide traders with a lot of flexibility,
with strategy options available for bearish, bullish
or neutral market environments. In addition to these
basic strategies of long calls, long puts, short calls,
and short puts, there are many other more complex
ones to choose from—which you can read about in
our Options Strategy Guide.
Option Buyer Strategies
The buyer of an option pays a premium up front to
buy an option. This is his or her maximum risk. As
for profit potential, it is unlimited for call option buyers
and is limited only by the difference between the
strike price and zero for put option buyers.
Long Call
October crude oil 145 call is currently trading
at 1.50 ($1,500).
The buyer of this call pays $1,500 (the premium) up
front. This is his or her maximum risk.
If October crude oil rises in price to 160, and the
buyer of the option exercises the option, he takes
a long position in the underlying futures from 145
(the “strike price”). With crude oil now at 160, profit
is calculated as follows:
Futures price 160.00
Less strike price 145.00
15.00
Less premium paid 1.50
Profit 13.50 x $1,000 = $13,500
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For each dollar that crude oil increases, the option
buyer’s profit increases $1,000. As there is theoreti-
cally no limit to how high the price of crude oil can
go, there is no limit to the profit that the buyer of the
call option can make.
Long Put
October crude oil 110 put is currently trading
at 3.50 ($350).
The buyer of this put pays $3,500 (“the premium”)
up front. This is his or her maximum risk.
If October crude oil falls in price to 105, and the
buyer of the option exercises the option, he or she
takes a short position in the underlying futures from
110 (the “strike price”).
Strike price 110.00
Less futures price 105.00
5.00
Less premium paid 3.50
Profit 1.50 x $1,000 = $1,500
For each dollar that the price of crude oil drops, the
option buyer’s profit increases $1,000. As the price of
crude oil can go no lower than zero, the put buyer’s
maximum profit is:
Strike price 110.00
Less futures price 0
110.00
Less premium paid 3.5.0
Profit 106.50 x $1,000 = $106,500
Option Writer Strategies
The writer (seller) of an option receives the premium
up front to write an option, with this being his or her
maximum profit potential. The writer of a call option
has unlimited potential loss, while the writer of a
put option has losses limited only by the difference
between the strike price and zero.
Short Call
October crude oil 145 call is currently trading
at 1.20 ($1,200).
The writer of this call receives $1,200 (the premium)
up front. This is his or her maximum profit po-
tential.
If October crude oil rises in price to $150, and the
buyer of the option exercises the option, the writer
is assigned a short position in the underlying futures
from 145 (the strike price). With crude oil now at 150,
his or her loss is calculated as follows:
Futures price 150.00
Less strike price 145.00
5.00
Less premium rec’d. 1.20
Loss 3.80 x $1,000 = $3,800
For each dollar that crude oil increases, the option
writer’s loss increases $1,000. As there is theoreti-
cally no limit to how high the price of crude oil can
go, there is no limit to the loss that the writer of the
call option can make.
Short Put
October crude oil 110 put is currently trading at
3.50 ($3,500).
The writer (seller) of this put receives $3,500 (the
premium) up front. This is his or her maximum
profit potential.
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If October crude oil falls in price to $105, and the
buyer of the option exercises the option, the writer is
”assigned” a long position in the underlying futures
from 110 (the strike price). With crude oil now at 105,
his or her loss is calculated as follows:
Strike price 110.00
Less futures price 105.00
5.00
Less premium rec’d. 3.50
Loss 1.5 x $1,000 = $1,500
For each dollar that the price of crude oil drops, the
option writer’s loss increases $1,000. As the price of
crude oil can go no lower than zero, the put buyer’s
maximum risk is:
Strike price 110
Less Futures price 0
110
Less premium rec’d. 3.5
Maximum risk 106.50 x $1,000 = $106,500
If you would like to learn more about options trading
strategies or how you can get started, please feel
free to contact an RJO Futures Sr. Trading Advisor
for more information. They can be reached at (800)
441-1616 or (312) 373-5478.
Quiz Yourself: Are You Ready to Advance to
the Next Step or Do You Need to Review?

1. An option means the buyer has the obligation to take a position in the
underlying futures market.
a. True
b. False

2. Which of these gives the buyer the right to go short, or sell, the underlying
futures market at a stated price, prior to option expiration?
a. Call
b. Put
c. Short
d. None of the above

3. How can you liquidate an option?

a. Expiration
b. Exercised
c. Offsetting trade
d. All of the above

4. Which of the following do you need to get right to profit in options?

a. Direction
b. Time frame
c. Amount of move
d. All of the above

5. The break-even point for both the buyer and writer of a call is the same.
a. True
b. False

6. Which of these describes when the strike price is at the same price as the
underlying futures?
a. At the money
b. In the money
c. Out of the money
d. None of the above

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7. Which of these describes the predetermined price at which the buyer of an
option has the right to take a position in the underlying futures?
a. Premium
b. Strike price
c. Margin
d. None of the above

8. A call option is in the money if the strike price is above the price of the
underlying futures.
a. True
b. False

9. Which of these is a component of the price of an option?

a. Intrinsic value
b. Time value
c. Neither a nor b
d. Both a and b

10. The break-even point for both the buyer and writer of a put is the same.
a. True
b. False

11. In choosing an option strategy, consider whether you are:

a. Bullish
b. Bearish
c. Neutral
d. All of the above

12. In reading options quotes, the symbol can consist of:

a. The symbol for the commodity
b. The symbol for the expiration month
c. The strike price
d. All of the above

13. Which of these is the closing price of the contract for the previous day?
a. Last
b. Chg
c. Previous settle
d. DTE
e. None of the above

14. If you think an asset price is going up, you would secure which of these?
a. Put
b. Call

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15. High volatility means higher options prices.
a. True
b. False

16. How do you calculate the break-even point for both the writer and buyer of
a call?
a. Strike price + premium – commissions and fees = break even
b. Strike price - premium – commissions and fees = break even
c. Strike price + premium + commissions and fees = break even
d. None of the above

17. Which options strategy is created by being long in one call and two put
options, all with the exact same strike price?
a. Strangle
b. Straddle
c. Spread
d. None of the above

18. In which options strategy does the investor hold a position in both a call and
put, with different strike prices but with the same maturity and underlying
asset?
a. Strangle
b. Straddle
c. Spread
d. None of the above

19. Which options strategy is established by purchasing one option and selling
another option of the same class but of a different series?
a. Strangle
b. Straddle
c. Spread
d. None of the above

20. In which options strategy does the investor hold a position in both a call and
put with the same strike price and expiration date?
a. Strangle
b. Straddle
c. Spread
d. None of the above

Answers and scoring on following page.

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Answers

1 (b), 2 (b), 3 (d), 4 (d), 5 (a), 6 (a), 7 (b), 8 (b), 9 (d), 10 (a), 11 (d), 12 (d), 13 (c), 14 (b), 15 (a), 16 (c), 17 (d), 18 (a), 19 (c), 20 (b)

Each correct answer equals 1 point.

My Score: _______

Scoring (out of 20 possible points)

17-20 = You Understand Options Basics

Contact an RJO Futures representative at 800-441-1616 now, and learn how you can turn
your new knowledge into possible trading opportunities. We can help.

12-16 = You May Want to Revisit the Material

You’ve learned a fair amount about options basics. But we recommend you revisit the material to fully
grasp the concepts. Once you have it down, you may be ready to apply what you’ve learned
to your trading.

1-11 = Definitely Revisit the Material, and Take the Quiz Again.
No worries. You simply need to reread the material and/or contact an RJO Futures Trading Consultant
at 800-441-1616 for assistance. We’ll be happy to walk you through any parts of this guide to help
you to better understand the content. And we offer many other resources to help you along the way.

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Get More Information About Options

Next Steps

We invite you to contact our Trading Team here at RJO Futures. They will be able to walk you through some of the
principles detailed in this guide — as well as take you to the next level in your understanding of Options.

Contact us at

Phone: (800) 441-1616 or (312) 373-5478

Email: info@rjofutures.com
Web: www.rjofutures.com

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RJO Futures Intro to Fundamental Analysis

Now that you’ve got a primer on options strategy, why not give our Intro to Fundamental Analysis guide a try? This
proprietary guide provides information on which related economic, financial, and other qualitative and quantitative
factors can be used to evaluate commodities in the agriculturals, softs, metals, and energies markets. Contact an
RJO Futures trading consultant at (800) 441-1616 or (312) 373-5478 to get your free copy today.

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