The Basics of Commodity Options Trading

Commodity options trading is one form of investment, and this investment involves more risks than many other types, but the returns are also higher. Commodity options trading is the buying and selling of options concerning commodities. Commodities are goods which are used in manufacturing, like wood, cotton, and others, as well as food stocks, such as grain including wheat, pork bellies, orange juice, and others. To understand commodity options trading, you must understand what commodities and options both are.

An option means that you have a right to buy or sell a specific amount of the commodity at a determined price, which is set now, at some point in the future. The intent is that the price of the commodity will rise or fall, and you will benefit from it. If you think that orange juice prices will rise, you would want an option to buy at the market price right now. If the price of this commodity goes up, you use the option to buy and then turn around and sell at the higher price, making a good return on your investment. With an option, there is no obligation though. If the commodity price does not go up, you choose not to buy. There is a premium paid for the option, which is determined by the parties in the trade. No matter whether you exercise your option or not, you do not get your premium back.

There are two specific option types, a call option and a put option. A call option is normally used when the option buyer believes that the commodity price will go up, and a put option is used when the belief is that the price will go down. In other words, an option to purchase is a call option and an option to sell is a put option, in the most basic sense. Options can also be long or short. An option that you purchase is a long option, and an option that you sell is considered a short option.

There are some things you should be aware of before getting into commodity options trading. Commodity futures charts can be a big help in commodity options trading. These charts can help you track and determine commodity risks, as well as expected future prices for a commodity. To start commodity options trading, there are a few things that you will need. You will need a trusted broker, a telephone or computer, and knowledge from research and commodity futures charts to help you make good investing decisions. You will also need to develop a trading strategy and guidelines, to help you minimize risk and maximize returns during your trading activities.

Commodity options trading can be very confusing at first, and can involve high risks. The best way to start commodity options trading is to use a paper or dummy account with your broker at first, to ensure you are comfortable and understand the market before you risk your hard earned money. Trading commodity options gives you the opportunity to limit your risks if desired. Options may come due at the end of any month, and the specific due expiration date of the option is specified in the contract. Basically, commodity options trading gives you the right to buy or sell a specific number of shares in a specific commodity by a specified date, which is at some point in the future. Even though you pay a premium for this option, you are under no obligation to exercise the option, and instead can let it expire. When this happens, the only cost to you is the premium paid to purchase the option.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.