The market for trading commodity options is simply a venue where producers of goods are given the chance to buy or sell a commodity at predetermined and fixed rate. Much like a farmer who is given by an insurance firm the right to collect on a particular plan in the event that his properties catch fire, traders of commodity options may also sell their options at a particular price if prevailing market rates go lower.
There are two kinds of commodity options. One takes the task of insuring products in case their current market price drops, while the other insures products that are bought against price increases. Buyers in commodity options market have the right and not the obligation to exercise their options.
Case in point, if a person decides to sell soybeans for $4 per sack, the commodity options market is the one that provides the opportunity for a trader to do so by paying the rate that has already been pre-agreed. If each sack is currently priced at only $5 each, then the commodity options trader has the option to sell his holdings for only $5 an then pocket the extra $1 as profit from his exercise.
Commodity options has two basic types: the call option and the put option. The call option gives you the right to buy the underlying commodity, while the put option gives you the right to sell the underlying commodity, all based on the price that has already been set. Here are some common jargon used when trading commodity options:
This does not refer to the commodity itself, but the futures contract for that particular good. For instance, the option for December corn is the option for a December delivery of the corn future contract.
The rate that was predetermined and set before the options were distributed is the called the specified price or the strike price. This is rate by which the underlying commodity may be traded at any time within the given time frame in the options contract.
Commodity options’ value are based on the future contracts of the underlying commodity. Thus, there is a given date upon with the options are expected to mature and expire. Options traders can choose to hold on to their assets until the last minute in the hopes of obtaining a bigger value for their options, but analysts caution against this because the longer you hold on to the options, the greater the risks involved. Traders who were unable to exercise their options are likely to see their holdings turn void and worthless once the expiration date has lapsed.
This is the amount that is paid to the option writer to obtain the rights granted in the option. It is determined by public voting and is likely to change every day. There are still many things that need to be discussed about commodity options trading and it is simply not enough to read one article about it. Scour the Internet for more information or ask the experts about it. Do not attempt to enter this industry if you are not armed with at least the basic concepts.