commodity options

Commodity Options

Bywww.CandlestickForums.com

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Commodity options are a commonly used means of handling investment risk

in trading commodity futures.

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By purchasing options contracts instead of directly purchasing futures contracts

traders retain the right to buy or sell futures but have no obligation to do so.



In using commodity options the trader will need to pay an option premium.



However, the premium is the extent of his or her risk in options trading. In buying calls or buying puts in the

commodities markets the trader can profit from a large shift in commodity

prices but not suffer a loss if prices move in an unexpected direction.



Traders selling puts and selling calls collect premiums in commodity options trading but also accept the risk of a large

loss.



Commodity and futures training will help the beginning trader get a handle

of commodity options.



Commodity options are options on whether to buy or sell commodity

futures.



Commodity futures trading is contracting to buy or sell a standardized

lot of a commodity at a future date.



If the price of the commodity goes up or down substantially and in the desired

direction the trader makes a handsome profit and if the commodity price moves

adversely the loss can be devastating.



By using commodity options the trader can buy a call or buy a put on a

commodity futures contract.



This will give him or her the right, but not the obligation, to buy or sell a

commodity futures contract.



If the trader believes that a commodity price is and will remain stable he or she may choose to sell puts or calls on the

commodity.



Providing that the price does remain stable the trader will gain the premium

on each trade. Over the long term selling options is typically more profitable than

buying.



However, the trader needs to be able to withstand an occasional substantial loss.



Whether the trader is dealing directly with commodity futures or chooses to

trade commodity options it is important to have a clear sense of the range of

possibilities the commodity in question will offer.



This starts with the basic fundamentals and then moves on to the technical aspects of the commodity market.



Both fundamental and technical analysis come into play as fundamental analysis will help predict the spot price of the commodity at contract expiration and

technical analysis will help predict daily price movement of the futures contract.



The trader is best served by doing his or her fundamental and technical analysis on the commodity in question well in

advance of trading it.



When the trader is quite certain in his or her belief that a commodity price will go up or down it may be best to simply buy

or sell a futures contract.



It is when there is some uncertainty involved that the trader will purchase

and options contract.



Then, if the desired price move occurs the commodity trader will execute the

options contract and buy or sell the commodity futures contract.



If the desired price movement does not occur he or she will simply swallow the price of the premium as a cost of doing business and not suffer a loss in direct

commodity trading.

