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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.”
2. What is the advantage of trading
commodity futures options versus
commodity futures?
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3. When trading futures in volatile
commodities markets, there is
substantial opportunity for investment
reward as well as investment risk.
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4. One means of reducing risk in
commodities trading is to trade options
on futures contracts.
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5. For example, buying calls and buying
puts on corn futures does not obligate
traders to buy or sell corn futures.
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6. Buying options in the commodities
market provides the opportunity to
enter the futures market if the prices are
right.
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7. 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.
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8. This is often a more profitable approach
long term but requires the ability to
withstand an occasional large loss.
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9. A good way to learn options trading in
the commodities markets is to take
Options & Futures Training or Options
Training with Stephen Bigalow.
www.CandlestickForums.com
10. 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.
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11. The premium for commodity futures
options is a cost of doing business.
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12. This cost is offset by traders not needing
to pay trading fees if options contracts
are not exercised.
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13. The premium becomes insignificant in
the event of a substantial and profitable
market move.
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14. 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.
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15. However, there are some new ways to
trade options including corn calendar
spread options.
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16. These are options contracts on the
month to month variation in futures
contract prices.
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17. In general commodity futures options
reduce trading risk and act as a way of
leveraging capital for potential gain.
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18. 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.
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19. 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.
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20. Today corporate
treasurers, bankers, farmers and equity
portfolio managers throughout the
world benefit from using options as risk
management tools.”
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21. The very same options strategies that
work for other equities are applicable in
commodity futures options.
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22. Traders often engage in long straddles by
buying both a put and a call on a
commodity future.
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23. The contracts are for the same
commodity and expiration date. This
strategy works well in a volatile market
as the trader will profit from either an
up turn or down turn in commodity
prices.
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24. If the commodity price does not change
the trader’s cost is two premiums.
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25. In the case of a stagnant market a trader
engaging in a short straddle strategy will
profit by selling a put and a call on the
same option for the same expiration
date.
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26. As in all futures and options trading the
use of technical analysis tools such as
Candlestick chart formations will help
the trader see the market more clearly.
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