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Options differ considerably from futures. When used prudently,
options can be of immense importance, especially in attempting
to preserve the value of an existing fixed-income portfolio.
To many in the financial markets, options are considered "insurance"
against adverse price movements while offering the flexibility
to benefit from possible favorable price movement.
The reasons for using options on futures are reflected in
the structure of an option contract.
First, an option, when purchased, gives the buyer the right,
but not the obligation, to buy or sell a specific amount
of a specific commodity at a specific price within a specific
period of time. By comparison, a futures contract requires
a buyer or seller to perform under the terms of the contract
if an open position is not offset before expiration.
Second, the decision to exercise the option is entirely that
of the buyer.
Third, the purchaser of the option can lose no more than the
initial amount of money invested (premium). That is not the case,
however, for the buyer of a futures contract.
Finally, an option buyer is never subject to margin calls.
This enables the purchaser to maintain a market position, despite
any adverse moves without putting up additional funds.
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