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training_data/relevant/text/d4154899c9806be42923254044e2bafed31d26246839365a0a3f00f8e57e89e6.txt

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+AN INTrOduCTION TO OPTIONS ON FuTureS
+between the futures price and the strike price were less than the premium paid for the option, the 
+net result of the trade would still be a loss. In order for the call buyer to realize a net profit, the dif-
+ference between the futures price and the strike price would have to exceed the premium at the time 
+the call was purchased (after adjusting for commission cost). The higher the futures price, the greater 
+the resulting profit. Of course, if the futures reach the desired objective, or the call buyer changes his 
+market opinion, he could sell his call prior to expiration.
+4
+The buyer of a put seeks to profit from an anticipated price decline by locking in a sales price. 
+Similar to the call buyer, his maximum possible loss is limited to the dollar amount of the premium 
+paid for the option. In the case of a put held until expiration, the trade would show a net profit if the 
+strike price exceeded the futures price by an amount greater than the premium of the put at purchase 
+(after adjusting for commission cost).
+While the buyer of a call or put has limited risk and unlimited potential gain,
+5 the reverse is true 
+for the seller. The option seller (“writer”) receives the dollar value of the premium in return for 
+undertaking the obligation to assume an opposite position at the strike price if an option is exercised. 
+For example, if a call is exercised, the seller must assume a short position in futures at the strike 
+price (since by exercising the call, the buyer assumes a long position at that price). 
+upon exercise, 
+the exchange’s clearinghouse will establish these opposite futures positions at the strike price. After 
+exercise, the call buyer and seller can either maintain or liquidate their respective futures positions.
+The seller of a call seeks to profit from an anticipated sideways to modestly declining market. In 
+such a situation, the premium earned by selling a call will provide the most attractive trading oppor-
+tunity. However, if the trader expected a large price decline, he would usually be better off going 
+short futures or buying a put—trades with open-ended profit potential. In a similar fashion, the seller 
+of a put seeks to profit from an anticipated sideways to modestly rising market.
+Some novices have trouble understanding why a trader would not always prefer the buy side of an 
+option (call or put, depending on his market opinion), since such a trade has unlimited potential and 
+limited risk. Such confusion reflects the failure to take probability into account. Although the option 
+seller’s theoretical risk is unlimited, the price levels that have the greatest probability of occurring 
+(i.e., prices in the vicinity of the market price at the time the option trade occurs) would result in a net 
+gain to the option seller. 
+roughly speaking, the option buyer accepts a large probability of a small loss 
+in return for a small probability of a large gain, whereas the option seller accepts a small probability 
+of a large loss in exchange for a large probability of a small gain. In an efficient market, neither the 
+consistent option buyer nor the consistent option seller should have any advantage over the long run.
+6
+4 even if the call is held until the expiration date, it will usually still be easier to offset the position in the options 
+market rather than exercising the call.
+5 T echnically speaking, the gains on a put would be limited, since prices cannot fall below zero; but for practical 
+purposes, it is entirely reasonable to speak of the maximum possible gain on a long put position as being unlimited.
+6 T o be precise, this statement is not intended to imply that the consistent option buyer and consistent option seller 
+would both have the same expected outcome (zero excluding transactions costs). Theoretically, on average, it is rea-
+sonable to expect the market to price options so there is some advantage to the seller to compensate option sellers for 
+providing price insurance—that is, assuming the highly undesirable exposure to a large, open-ended loss. So, in effect, 
+option sellers would have a more attractive return profile and a less attractive risk profile than option buyers, and it 
+is in this sense that the market will, on average, price options so that there is no net advantage to the buyer or seller.