How to Sell Commodity Options
Selling options is a high probability trading strategy, but the risks involved in any one trade are greater than the risks involved when buying options. When you sell an option, you receive a credit to your trading account in the form of a premium paid by the option buyer. If the option expires without the buyer exercising, you will retain the premium. However, if the options is exercised, you will need to offset your position to exit the commodity market.
Other People Are Reading
Instructions
-
-
1
Open an account with a commodity futures broker. There are several factors to consider when choosing a broker. These include things like commissions, account minimums, online trading platforms and customer support. The CME Group has an extensive listing of U.S. brokers on their website.
-
2
Check with the broker to determine the account requirements for option selling. The risks involved in option selling are similar to the risks involved in futures trading. Therefore, most brokers will probably have the same account requirements for both kinds of trading. However, your broker may offer more lenient terms if you only plan on selling commodity options as part of a spread trading strategy in which you buy an equal number of offsetting options.
-
-
3
When selling an option, specify a quantity, option variety, market and strike price. For example, you might call your broker and place an order by saying, "I'd like to sell one December wheat call option at a strike price of 705." Commodity markets are divided by the month in which they expire, so December, March and May wheat are three separate markets.
Additionally, options are divided into calls and puts. Calls are options to buy a market while puts are options to sell a market short. Since you are selling these options, you should sell a call when you expect the market to go down and sell a put when you expect the market to go up. Finally, the strike price is the price at which the option buyer may exercise the option. When selling options, you want to avoid exercise so you should pick a strike price that the market will not cross during the life of the option.
-
4
To close the trade, either let the option expire or enter an offsetting position. Ideally, when you sell an option, the option will expire without any intrinsic value and you will retain the premium you received when you sold the option. However, if the option becomes profitable and the option buyer chooses to exercise, you may be forced to enter an offsetting position to cut your losses. For example, if you sell a December wheat call and the option buyer exercises, you would be short the December wheat market. To exit the market, you would simply buy an offsetting December wheat contract to exit the market.
-
1
