Online Forex Trading

Commodity Online Option Trading: Framework of Option Contracts

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.

Commodity Online Option

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.