Online options trading in commodity, forex and stocks has advantages like high yield with low margins, low commissions, and risk hedging. Online options trading can be considered as an excellent tool to earn high returns especially when the markets are passing through a phase of high volatility. Online option trading can be done in a variety of ways by following dozens of commodity option strategies.

Basic strategies:

Plain vanilla strategy is the alternate name for basic trades in online option trading. It involves buying call or put option (Long Call or Long Put) and selling call or put (Short Call or Short Put). When you trade long call or long put you can profit from the rise or fall in the price of the underlying assets. Long call or put can give you unlimited profit whereas the loss is limited to the amount of option premium paid by you.

Shorting a call or put (call/put writing) is a highly risky trade that can lead to huge losses. Here the profit is limited whereas the loss is unlimited. Call/Put writing is a skill that can be acquired only after thorough understanding of the intricacies involved in options trading. It takes years to develop the guts and skills required for call/put writing.

Remember that call option premium goes up if the price of the underlying commodity rises and vice-versa. Put option premium rises if the value of underlying commodity falls. There are many factors like time to expiry and implied volatility that can affect the proportion in which the premium value and the price of the underlying asset change with respect to each other.

Advanced strategies for online option trading:

In basic option strategies you take the position in naked call or put i.e. without any accompanying trades. Whereas in advanced strategies you take two or more positions in different expiry contracts in conjunctions with long, put, cash market and futures market. These strategies are best suited for hedging purposes and also for bulk trades (buying couples of contracts at a time). Covered call, spreads, straddles, strangles, butterfly – these are jargons of highly complicated advanced option trading strategies.

Summing Up
Learning the tricks of online options trading is a piece of cake if you are good at Math and Statistics. Most of the advanced strategies rely on option Greeks or option pricing models based on various mathematical and statistical fundamentals.

Commodity online option trading has provided an excellent tool to the hedgers and traders alike. In order to able to successful trader in commodity online option trading, it is essential to learn the intricacies of commodity options. This article tries to explain few more fundamental aspects on commodity options.

Contracts Specification

For commodity online option trading, you must understand the most important parameter known as contract specification or term sheet. Essentially speaking, any commodity options contract has four core components. Underlying commodity and its quantity, call or put, strike or exercise price and expiry date. Besides these four components, there are two more important features. Settlement terms of the contract and style of the option viz. American or European. Settlement terms can involve sash settlement or physical delivery or conversion to futures contract.

Option Pricing

Before you start commodity online option trading, you should have a fair idea about option pricing. Option price or premium is essentially derived from the futures contract which in turn tracks the cash or spot value of the underlying commodity.

In reality, the option pricing is a pretty complex task. There are many variables such as time component, implied volatility and option Greeks. Black Scholes model, stochastic calculus, and binomial pricing models are few Option pricing theories and models. Most of the commodity traders rely upon readily available calculators and analytical tools.

In the Money, At the Money and Out of Money Option:

In the money or at the money or out of money nature of option also plays a vital role in the option pricing.

When the strike price of the call option contract is less than the current market price of the underlying commodity futures then the call option is said to be in the money. Out of money call option signifies that the strike price is more than the current price.

In the money put option conveys that the strike price is more than current futures price. An out of the money put option indicates strike price is less than current futures price.

When the strike price and current price are equal then the call or put option is referred to as at the money option.