Commercial hedgers are corporations and sometime individuals, that seek to ensure the stability of a given commodity by taking a position in the commodities market. Take peas for example, and the hedger, a food processor who cans them. If pea prices go up the hedger ends up having to pay the farmer or pea dealer more. Because it is basically a cash commodity, to protect himself against higher pea prices, the processor can “hedge” his risk exposure by buying enough pea futures contracts to cover the amount of peas he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of peas rise enough to offset cash pea losses.Speculators are the second major group of futures players. These participants include independent floor traders and investors. A speculator is a person, or more likely an institution, that purchases or sells the commodities based on factors other than simply analysis. Whereas investors will focus, by and large, on detailed analysis.Gambling With Your FuturesFive Reasons To Roll the DiceSince most individual traders are speculators, here is a list of some of the advantages and disadvantages of the futures market over other investment possibilities. 1. The possibility exist that a person can make more money faster in the futures market, because  the speed of prices tend to change faster than stocks. Conversely, bad judgment can cause one to suffer greater losses than traditional investments.2. Futures are highly leveraged investments. The trader only puts up about 15-20% as a margin, yet still being able to ride the full amount of the contract. Unlike stocks where at least 50% of its value has to be put up, and the investor pays interest on the difference between the margin and the full contract value. 3. For the most part there is no inside trading. Everyone has the same insiders information on the weather, for example. This is an open outcry market, very public, which insures a fair outcome.4. Commission charges on futures trades are small compared to other investments, and the investor pays them after the position is liquidated.5. Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade’s execution. I hope this has helped in your research. I don’t profess to being an expert, but I do know of some. I obviously don’t have the time to go into all the details now, but at my site  Market Mentalist you will find all you need to know about investing online. I have a page devoted to futures. There is access to some of the top trading systems available including software, books, newsletters, and Forums. Whether you are an inquisitive novice or a seasoned pro Market Mentalist offers the online investment resource you just might be seeking.

But where the does the long term investor fit in? Are there any option trading strategies that the conservative investor can employ to enhance his or her long term returns?

In fact, there are.

Leveraged Investing

There are actually a number of option trading strategies that can be employed by the long term investor. Leveraged Investing is the name I’ve given this approach, and these are the strategies I use myself.

The point of Leveraged Investing is to use options to acquire stock for a discount and then to generate additional returns above and beyond the actual performance of the stock itself.

Here are just two examples:

[Please note: in the interest of simplicity, commissions have been excluded from all examples.]

Example #1 – Writing Covered Calls. Writing covered calls is a popular, and generally conservative, income-producing strategy. A call option gives the holder the right, but not the obligation, to purchase 100 shares of the underlying stock at a certain price (strike price) by a certain date (expiration date).

Conversely, when you write, or sell, a call option on shares that you own, you sell (you receive a premium in the form of cash) someone else the right to purchase your stock at a certain price at or prior to the expiration date. If you own 100 shares of a stock trading at $28/share, you could write a $30 covered call expiring in one month. If the stock closes above $30/share, you’ll be obligated to sell your shares for $30/share. But if the stock closes at or below $30/share, the call option will expire worthless and you’re free to repeat the process. Either way, the premium received is yours to keep.

Writing covered calls is a great way to generate additional income from your investments, but the long term investor must take extra precautions to avoid being called out and forced to sell his or her long term holdings (I call one such precaution, The 1/3 Covered Call Writing Strategy–it basically consists of writing covered calls on only a portion of your portfolio in order to give yourself greater flexibility and protection against sharp moves higher by the stock).

Example #2 – Writing Puts to Acquire Stock at a Discount. A put option, in contrast, gives the holder the right, but not the obligation, to sell 100 shares of the underlying stock at a certain price by a certain date. When you write, or sell, a put, you’re essentially insuring someone else’s shares against a drop below the agreed upon strike price.

Like writing covered calls, writing puts can be a great source of income. In fact, the risk-reward profiles for writing puts and writing covered calls are essentially the same. Whereas call writers may write calls out of the money, at the money, or even in the money (the most conservative approach), put writers will typically write out of the money puts (e.g. writing a put with a $30 strike price on a stock currently trading at $32/share).

But for the long term investor, income is of less importance than the opportunity to buy a stock at a lower price that what it’s currently trading at. Writing an at the money put will greatly improve the likelihood of acquiring the stock, and you’ll also receive the most pure premium.

Example: Suppose you write an at the money put on a stock that you really like. If the stock is trading at $30/share and you write the put at the $30 strike price for, let’s say, $2.50 in premium (or $250 in cash since each option contract represents 100 shares of the underlying stock) you’re setting yourself up for a win-win situation. That’s not to say you can’t lose money on the deal, but look at the two possible scenarios.

Conclusion:

As they say, options involve risk and may not be suitable for everyone. But not all option trading strategies have to be high risk propositions. Some approaches, in fact, may offer substantial benefits for the conservative investor. If you are a long term investor, it may be worth your while to conduct additional research to see if there should be a place in your portfolio for options.