Wednesday, April 24th, 2019

What Is Commodity Options Trading?

 

Buying and selling futures on oil, gold, or wheat can be very profitable. It can also be risky. Many commodity traders buy options to hedge risk. But what is commodity options trading? Traders buy and sell futures on commodities such as oil, gold, and agricultural products. If they wish to buy or sell options the calls or puts are on commodity futures contracts. What is commodity options trading to producers and buyers of commodities? It is a commonly a means of hedging risk. What is commodity options trading for the speculator? It is a means of earning a profit from fluctuations in commodity prices. Let’s start by taking a look at commodity futures.

Commodity Futures

Futures contracts are a standardized means of contracting the sale and purchase of a commodity such as corn, stocks on the NYSE, or a Forex currency. Futures contracts for commodities such as crude oil specify a quantity and price as of a specified future date. Time passes and commodity prices change due to supply and demand issues. When the value of futures contracts change, traders profit or lose. In a volatile market many commodity futures traders choose the options route in order to retain the right to buy or sell and not carry any obligation to do so.

Commodity Futures Markets:

  • CME Group
  • IntercontinentalExchange
  • NYSE Euronext
  • South African Futures Exchange – SAFEX
  • Sydney Futures Exchange
  • Tokyo Commodity Exchange TOCOM
  • London Metal
  • Intercontinental Exchange (ICE Futures U.S.)
  • New York Mercantile Exchange CME Group

Options Markets

There are a number of options markets. The CME Group which evolved from COMEX, NYMEX, CBOT, and CME is the oldest and largest. Please see the list below:

  • CME Group
  • Boston Options Exchange (BOX)
  • International Securities Exchange (ISE)
  • NASDAQ OMX
  • NASDAQ OMX PHLX
  • NYSE Amex
  • NYSE Arca

What is commodity options trading on these markets? It is the buying and selling of options contracts on various commodity futures for the purpose of hedging risk or seeking profits. Commodity futures options trading is similar to trading options on stock and Forex futures in its mechanism. What is different is that commodity prices may react differently to economic conditions than currencies or stocks. For example, when oil prices go up as well as futures prices, stocks often fall. Commodity traders, commodity futures traders, commodity futures options traders follow their own supply and demand issues and other market conditions.

What is commodity options trading for the part time home trader? It is an opportunity to leverage life experience, diligent research, and trading skills into handsome profits. Because the trader does not tie up money buying or selling commodities and does not need to carry a large margin in a trading account he can invest small amounts in out of the money options contracts with the chance of substantial profits if the market moves as he anticipates. What is commodity futures options trading to the risk-averse? It is the opportunity to trade oil, gold, agricultural futures and more while limiting risk to the cost of an options contract. Profitable options strategies that work for stocks and currencies can work as well in trading options on commodity futures. What is needed is homework and development of the skill set needed for profitable trading.

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