Dissecting the Body of an Options Trading Contract
While these features do not represent all of the aspects of an options trading contract, they do create its structure:

• Underlying Asset – In order to write an options trading contract, you certainly have to include the commodities that contract is buying. Corn futures, gold and silver are all examples of commodities that can be underlying assets.
  
  
• Strike Price – The strike price, which is also known as the exercise price, is amount for which the commodities will be sold or bought if the commodity trading occurs as detailed in the contract. It is the difference between the current price and the strike price that gives either the buyer or seller their profit.
  
  
• Exercise Style – The exercise style is important to the successful trader because of the impact it has on investment strategy. An American style contract means that the contract can be exercised at any time up to the expiration date. European style contracts can only be exercised on the expiration date. This information is included in the contract.
  
  
• Expiration Date – For European contracts, this date is when the contract will be executed. For American contracts, this is the last day for futures trading on this contract.

Factors Affecting Commodities Contracts
There are a number of factors that can have an effect on commodities contracts. These factors can determine when a contract is implemented, when it is exercised and how much it costs. Futures contracts have variables such as:

1. Current Price Relative to the Strike Price. Depending on the investment philosophy involved, a trader might buy commodities that are “in the money”, “out of the money’, or “at the money.” These terms are comparative between the strike price and the current price.
   
   
   1. In The Money – If a commodities contract is already profitable when it is purchased, it is referred to as in the money. Sellers will sometimes use this investment strategy when they believe that a commodity price will fall, taking it out of the money.
      
      
   2. Out Of The Money – If a commodities contract is purchased while it is still losing money; it is referred to as out of the money. If a call option is purchased when the current price is below the strike price, it would fall into this category.
      
      
   3. At The Money – If the current price and the strike price are the same, the contract is at the money.
      
      
2. Premium Price. The premium is the amount that the investor will pay to purchase a particular futures commodity. This amount is affected by several factors but it is basically the cost of a commodities contract.
   
   
3. Length of a Contract. The time from the purchase date of a contract until its expiration date can affect the cost of the premium. The longer the contract, the more likely that the terms of the contract will be met; this means that the premium would go up to reflect that probability.
   
   
4. Complexity of the Contract. The type of contract written on futures options can affect the premium price. A simple market order that is out of the money will cost less than selling covered calls.

Conclusion
Commodities can be complex and their contracts can contain many things. Looking closely and examining the “skeleton” of a commodities contract and understanding its investment basics can help “pass the test” of being a successful investor. And you don’t have to worry because we won’t even need Mr. Bones!

Market Direction: Having the ability to interpret what is going on in a price trend is extremely valuable. Candlestick analysis makes that process very easy. Because candlestick analysis is based upon common sense interpretations of what is occurring an investor sentiment, learning that process is relatively easy if it is done on a step-by-step process. (See this week's training seminars special). Because of the information incorporated into each one of the signals, recognizing and evaluating those signals at important technical levels makes trend analysis easy to understand. Recognizing the signals, in specific pattern setups, provides a format for participating in high profit potential trades.

This analysis can be clearly seen in the recommendation of ABXA. The application of pattern recognition, in this case the potential of a Jay hook pattern forming, was the basis for our recommendation. The Jay hook pattern provides some very simple entry criteria: When to get in, when to get back out if the pattern doesn't confirm, where the resistance levels should be and what to do at those resistance levels. When prices come up through the recent high, that becomes confirmation that the Bulls are still in control. The probabilities of the next strong wave, equivalent to the first wave before the Jay hook pattern, is now likely to occur.

ABXA

Do all patterns work out well? Not always, but being able to analyze what the pattern should be doing at specific levels allows an investor to get into or out of a trade at the proper times. The benefit of being able to analyze what the signals are illustrating at specific levels of a price pattern still provides the opportunity to make a small profit on a trade that is not working.

Common sense evaluation can be applied to the market in general. The Dow clearly demonstrated over the past few weeks that it was in a sideways trading channel. When the Dow pulled back through the 50 day moving average and the bottom of a trading channel, it formed Doji's. This clearly indicated there was indecisive trading on the 50 day moving average. The analysis from that point was relatively easy. A breach of the 50 day moving average would indicate that it was not going to act as support. The downtrend could be moving much lower. Witnessing a bullish candle at the 50 day moving average after a couple of Doji's and at a support level, made it obvious that the Bulls were once again stepping in at this level.

DOW

NAS

Does this mean the markets are heading back up? The probabilities indicate that they are. Will it be a strong rally from this point? The first test will be the top of the trading channel. If it breaks through that level, the analysis has to be that the next up-leg of this market is in progress. A failure at that level would tell us the sideways moving channel is still in progress. At this point, the anticipated trend should be positive for the next few days. A close below the 50 day MA would negate that scenario. These conclusions are based upon the probabilities of what prices should do after witnessing signals occurring at specific technical levels.

Chat session - Chat session tonight at 8 p.m. ET open to everybody.

Click here for instructions.

Good investing,

The Candlestick Forum Team