Commodity Futures Options

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Commodity Futures Options

What is the advantage of trading commodity futures options versus commodity futures? When trading futures in volatile commodities markets, there is substantial opportunity for investment reward as well as investment risk. One means of reducing risk in commodities trading is to trade options on futures contracts. For example, buying calls and buying puts on corn futures does not obligate traders to buy or sell corn futures.

Buying options in the commodities market provides the opportunity to enter the futures market if the prices are right. On the other hand selling calls and selling puts is done when the trader believes that market in a commodity will be stable during the term of the options contract. This is often a more profitable approach long term but requires the ability to withstand an occasional large loss. A good way to learn options trading in the commodities markets is to take Options & Futures Training or Options Training with Stephen Bigalow.

Commodity futures options are a risk management tool. Just as commodity producers use commodity investing as a hedging strategy to guard against commodity price fluctuation speculators use options trading. The premium for commodity futures options is a cost of doing business. This cost is offset by traders not needing to pay trading fees if options contracts are not exercised. The premium becomes insignificant in the event of a substantial and profitable market move.

Commodity futures options typically provide the buyer with the right but not the obligation to buy or sell a futures contact up until contract expiration. However, there are some new ways to trade options including corn calendar spread options. These are options contracts on the month to month variation in futures contract prices. In general commodity futures options reduce trading risk and act as a way of leveraging capital for potential gain.

As stated by the Chicago Mercantile Exchange, “With options, traders can construct [trading strategies] that profit in advancing, declining or even stable markets, while at the same time reducing risk and increasing leverage. In addition, because options also can be used to protect against adverse price moves in livestock, interest rate, foreign exchange and equity markets, they have become an increasingly popular hedging vehicle. Today corporate treasurers, bankers, farmers and equity portfolio managers throughout the world benefit from using options as risk management tools.”

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Commodity Futures Options

  1. 1. Commodity Futures Options By www.CandlestickForums.com
  2. 2. What is the advantage of tradingcommodity futures options versus commodity futures? www.CandlestickForums.com
  3. 3. When trading futures in volatile commodities markets, there issubstantial opportunity for investment reward as well as investment risk. www.CandlestickForums.com
  4. 4. One means of reducing risk incommodities trading is to trade options on futures contracts. www.CandlestickForums.com
  5. 5. For example, buying calls and buyingputs on corn futures does not obligate traders to buy or sell corn futures. www.CandlestickForums.com
  6. 6. Buying options in the commodities market provides the opportunity toenter the futures market if the prices are right. www.CandlestickForums.com
  7. 7. On the other hand selling calls and selling puts is done when the traderbelieves that market in a commodity willbe stable during the term of the options contract. www.CandlestickForums.com
  8. 8. This is often a more profitable approach long term but requires the ability to withstand an occasional large loss. www.CandlestickForums.com
  9. 9. A good way to learn options trading in the commodities markets is to takeOptions & Futures Training or Options Training with Stephen Bigalow. www.CandlestickForums.com
  10. 10. Commodity futures options are a risk management tool. Just as commodityproducers use commodity investing as a hedging strategy to guard againstcommodity price fluctuation speculators use options trading. www.CandlestickForums.com
  11. 11. The premium for commodity futures options is a cost of doing business. www.CandlestickForums.com
  12. 12. This cost is offset by traders not needing to pay trading fees if options contracts are not exercised. www.CandlestickForums.com
  13. 13. The premium becomes insignificant inthe event of a substantial and profitable market move. www.CandlestickForums.com
  14. 14. Commodity futures options typicallyprovide the buyer with the right but not the obligation to buy or sell a futures contact up until contract expiration. www.CandlestickForums.com
  15. 15. However, there are some new ways totrade options including corn calendar spread options. www.CandlestickForums.com
  16. 16. These are options contracts on themonth to month variation in futures contract prices. www.CandlestickForums.com
  17. 17. In general commodity futures optionsreduce trading risk and act as a way of leveraging capital for potential gain. www.CandlestickForums.com
  18. 18. As stated by the Chicago Mercantile Exchange, “With options, traders canconstruct [trading strategies] that profit in advancing, declining or even stable markets, while at the same time reducing risk and increasing leverage. www.CandlestickForums.com
  19. 19. In addition, because options also can be used to protect against adverse pricemoves in livestock, interest rate, foreignexchange and equity markets, they havebecome an increasingly popular hedging vehicle. www.CandlestickForums.com
  20. 20. Today corporatetreasurers, bankers, farmers and equity portfolio managers throughout theworld benefit from using options as risk management tools.” www.CandlestickForums.com
  21. 21. The very same options strategies thatwork for other equities are applicable in commodity futures options. www.CandlestickForums.com
  22. 22. Traders often engage in long straddles by buying both a put and a call on a commodity future. www.CandlestickForums.com
  23. 23. The contracts are for the same commodity and expiration date. Thisstrategy works well in a volatile market as the trader will profit from either an up turn or down turn in commodity prices. www.CandlestickForums.com
  24. 24. If the commodity price does not change the trader’s cost is two premiums. www.CandlestickForums.com
  25. 25. In the case of a stagnant market a traderengaging in a short straddle strategy will profit by selling a put and a call on the same option for the same expiration date. www.CandlestickForums.com
  26. 26. As in all futures and options trading the use of technical analysis tools such as Candlestick chart formations will helpthe trader see the market more clearly. www.CandlestickForums.com

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