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.”