How to Invest in Commodity Options
Commodity options use leverage, or borrowed funds, from your agent firm. When the underlying commodity of your options moves in the direction you've predicted, the options contract returns a profit. Commodities have historically performed well in periods of rising inflation.
According to the 2009 book "Commodity Options: Trading and Hedging Volatility In The World's Most Lucrative Market," commodity options differ substantially from equity options.
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Identification
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Arrange an account with a commodity options and futures firm. Most commodity options brokers in 2010 offer an online trading portal. Determine that the firm you've selected offers an Internet-based trading platform. Locate the "New Accounts" tab on the broker's site. Provide the required information and submit as directed. When the broker approves your account, deposit funds as requested.
Types
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Identify the commodity of your choice. Commodities, like stock industry groups, may trade in relation to others in its sector type. Energy, metals, agricultural produce and grains represent commodities sectors.
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Considerations
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Review the options table for the underlying commodity you've selected. The list presents the options by their strike price. Similar to an equity option, the strike price is the predetermined price at which the call or put is exercised at some time in the future. A commodities option may also be resold into the open market at any time prior to expiration without entering the commodities market.
Commodities options differ from equity options because of the nature of the underlying contract. Unlike an equity option -- whose underlying is usually common stock -- the underlying of a commodities option is instead a futures contract. When exercising a commodities option, the logistics of exercise differ from the equity market.
Significance
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Buy an option in accordance with your views about the underlying commodity markets. When your perspective of the commodity price is favorable -- when you believe the price will rise -- buy a call option. Purchase a put option if you believe the underlying commodity price will fall. Determine the strike price of the options contract. Enter an order at the market price on the trading portal screen.
Function
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Liquidate a commodities option by selling the contract into the market. To capture a profit or book a loss in an options contract, order the broker firm to sell.
Potential
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Enter more complex trades, such as intracommodity spreads, to take advantage of short-term differences in the same commodity. According to "A Trader's First Book on Commodities," a book published in 2010, an intracommodity spread buys a contract for one month and shorts a contract of the same underlying in a different month. The spread seeks to capture the relative increase or decrease in the commodity.
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References
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