Commodity Options

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Commodity Options

Commodity options are a commonly used means of handling investment risk in trading commodity futures. 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.

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Commodity Options

  1. 1. Commodity Options Bywww.CandlestickForums.com
  2. 2. Commodity options are a commonlyused means of handling investment risk in trading commodity futures. www.CandlestickForums.com
  3. 3. By purchasing options contracts insteadof directly purchasing futures contracts traders retain the right to buy or sellfutures but have no obligation to do so. www.CandlestickForums.com
  4. 4. In using commodity options the trader will need to pay an option premium. www.CandlestickForums.com
  5. 5. 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 commodityprices but not suffer a loss if prices move in an unexpected direction. www.CandlestickForums.com
  6. 6. Traders selling puts and selling calls collect premiums in commodity optionstrading but also accept the risk of a large loss. www.CandlestickForums.com
  7. 7. Commodity and futures training will help the beginning trader get a handle of commodity options. www.CandlestickForums.com
  8. 8. Commodity options are options onwhether to buy or sell commodity futures. www.CandlestickForums.com
  9. 9. Commodity futures trading iscontracting to buy or sell a standardized lot of a commodity at a future date. www.CandlestickForums.com
  10. 10. If the price of the commodity goes up or down substantially and in the desired direction the trader makes a handsomeprofit and if the commodity price moves adversely the loss can be devastating. www.CandlestickForums.com
  11. 11. By using commodity options the trader can buy a call or buy a put on a commodity futures contract. www.CandlestickForums.com
  12. 12. This will give him or her the right, but not the obligation, to buy or sell a commodity futures contract. www.CandlestickForums.com
  13. 13. If the trader believes that a commodityprice is and will remain stable he or she may choose to sell puts or calls on the commodity. www.CandlestickForums.com
  14. 14. Providing that the price does remain stable the trader will gain the premiumon each trade. Over the long term sellingoptions is typically more profitable than buying. www.CandlestickForums.com
  15. 15. However, the trader needs to be able towithstand an occasional substantial loss. www.CandlestickForums.com
  16. 16. Whether the trader is dealing directly with commodity futures or chooses totrade commodity options it is important to have a clear sense of the range ofpossibilities the commodity in question will offer. www.CandlestickForums.com
  17. 17. This starts with the basic fundamentals and then moves on to the technical aspects of the commodity market. www.CandlestickForums.com
  18. 18. Both fundamental and technical analysiscome into play as fundamental analysis will help predict the spot price of the commodity at contract expiration andtechnical analysis will help predict dailyprice movement of the futures contract. www.CandlestickForums.com
  19. 19. The trader is best served by doing his orher fundamental and technical analysis on the commodity in question well in advance of trading it. www.CandlestickForums.com
  20. 20. When the trader is quite certain in his orher belief that a commodity price will goup or down it may be best to simply buy or sell a futures contract. www.CandlestickForums.com
  21. 21. It is when there is some uncertaintyinvolved that the trader will purchase and options contract. www.CandlestickForums.com
  22. 22. Then, if the desired price move occursthe commodity trader will execute the options contract and buy or sell the commodity futures contract. www.CandlestickForums.com
  23. 23. If the desired price movement does notoccur he or she will simply swallow theprice of the premium as a cost of doing business and not suffer a loss in direct commodity trading. www.CandlestickForums.com

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