Online Forex Trading

Commodity Options Trading: An Introduction to Commodity Options

Brief History

Although, option trading was known to the traders for couple of decades in the past but commodity options trading contracts were introduced by the recognized exchanges only during early 1990s. Over the last 20-30 years commodity options trading has gained tremendous popularity because of its distinct features and immense potential of generating high yield at lower costs and negligible margins.

Commodity trade

Quintessence of Option explained

In financial lingo, an option is defined as a financial instrument that confers a right without obligation to execute a transaction on the underlying futures contract or a security or a physical asset.

A futures contract provides equal rights to both the parties whereas an options contract grants right to only one party – the buyer. If the contract tends to be favorable to the buyer then he can exercise his right to execution of the contract. On the contrary if the buyer feels that with the execution of the contract he would end up in a loss making proposition then the buyer can choose to back out or dishonor the deal or agreement. Buyer has the right but not the obligation to fulfill the contract.

Applications of Options

Options contracts are available on commodities like gold, metal, energy and agricultural products; financial products like currency future, interest rate; stocks and stocks indices and other class of assets like real estate. Commodity options trading have been universally accepted as an attractive class of asset as compared to other options contracts.

You can hedge the risks of existing position in a futures contract or cash or physical asset by commodity options trading. Options contracts also offer an excellent investment opportunity to a speculator or trader to profit from the fluctuations in option price.

Summing Up

Commodity options trading demand an in-depth knowledge of various facets of options. Tomorrow Carry on reading another article “Commodity Option Trading: Fundamentals of Commodity Options”.