Commodity Options Trading

Commodity Options Trading

Selling options (also referred to as writing options) is not a common strategy in commodity trading, but it has been used by many professional traders for years. It is a strategy that puts odds in favor of the writer, especially when it is done properly. But just like any investment instrument, things can go bad when the risks are not managed adequately.

Kinds Of Options

There are only 2 kinds of options – calls and puts. A trader can either purchase a call or sell it, the same is also true for puts. When a trader decides to purchase a call, then he has the right (but not the obligation) to purchase an asset (in this case, a commodity contract). On the other hand, the writer of the option has an obligation to sell it at the strike price, should the trader decide to exercise it.

On the other hand, if a trader purchases a put option, then he has the right (not the obligation) to sell the commodity at the strike price before the expiration date. The option writer will then have the legal obligation to make the purchase.

Why Buy Commodities Options?

Options are perfect strategies for trading because they limit risk and leverage. When a trader purchases an option, his losses are limited to the price he pays for the option. On the other hand, it also allows the trader to control a more expensive asset without having to purchase it outright.

If the trader believes that prices are going to increase then he can purchase an options contract (or a put options if he believes that prices are going to decrease) and then exercise the contract at any time before the expiration date. If prices do not change, and the options expire worthless, the options writer gains the premium paid for the options. On the other hand, the trader loses only the amount he paid for the options.

Now if you’re thinking of trading commodities options, you need to understand something: most people who trade options lose money. Why? Because they buy options and don’t take advantage of other strategies. Most people buy options but they fail to consider its fair market value and implied volatility. As a result, many traders purchase overpriced options and will often lose the premium they paid because 80% of options expire worthless. In this case, it is important to note that buying options does not work alone, it must be put together with a safe (and powerful) strategy to generate profit. This essentially means one thing: if you’re thinking about trading options, you need to have an in-depth understanding of commodities trading to take full advantage of its benefits.

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