Commodity Options Trading
With commodity options trading, an investor has the opportunity to make money from both ends of the market, be it a bearish one or a bullish one. Basically, with a commodity option, the holder of the option is able to buy or sell commodities like wheat or soya at a specified future date. The investor will purchase a ‘Put’ option if he thinks that the price of the commodity will drop.
On the other hand, if he thinks that the price of the commodity will rise, he will purchase a ‘call’ option. The best part of the transaction is that the investor does not have to take actual delivery of the commodity to profit from the trade.
Commodity options trading are conducted through a brokerage firm by using the Chicago Board Options Exchange (CBOE), the busiest and largest exchange in the world. Prior to 1973, before the opening of the CBOE, an investor was limited in his choice of financial assets to invest in. He could only trade with instruments like Bonds or Stocks that are traded over the other exchanges like the New York Stock Exchange (NYSE).
As mentioned earlier, an investor does not have to take actual delivery of the physical commodity when he is trading in commodity options. This is because there is a huge difference between the option and the underlying commodity on which the option is based on. For example, with an option, there is value that is tied to its expiration date. The physical commodity value on the other hand, does not have an expiration date. Furthermore because of the nature of options, the number of options that can exist is theoretically limitless. Commodities, due to its physical nature, are limited in this aspect.
Trading in commodity options is a very simple process. For example, you think that time the price of wheat will rise due to a shortage in the market because of bad weather in 3 months. As such, you will purchase a ‘Call’ option for 100 bushels of wheat. What you are in fact doing is to ‘lock’ in the price of the commodity so that hopefully before the option expires, the price of wheat will rise. When the price of wheat does in fact rise, the value of the ‘Call’ option will also increase in value. For the privilege of the rights of an option, an investor pays what is known as a ‘premium’. This represents the only cost to the investor for the potential of limitless profits.
Traditionally, commodity options were traded through a live broker of a brokerage firm. All relevant trading information research was conducted by the brokerage firm. Today, with the advancement of online trading, most investors are more or less self sufficient in trading. This has helped lowered the overheads and allowing lower commission to be charged by the brokers. In this sense, investors today benefit from online trading in term of cost. The only thing is that the investor have to be well educated himself in the market that he wishes to trade in.
Another easy and simple way to trade commodities online these days are trading them through one of the binary options brokers. Trading commodities using binary options allow you to simply choose the direction of the market movement of your underlying asset and gain sometimes up to 81% with our buying the real assets .
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