So, if you understand what commodity trading is, we want to tell you more about options. Commodity options are a very convenient and efficient method to participate and trade in futures markets. For instance, options on futures provide traders with the capacity to profit from leverage, and at the same time gives them the ability to handle risk.

For instance, an investor can craft a trading strategy in the commodities market by utilizing a combination of long and short call & put options. This combination will fit their wants and expectations and such type of agreement is called an option spread. However, one should bear in mind that the possibilities are infinite and will be influenced by the investor’s aim, time horizon, risk appetite, and market conditions.

Now we will explain the fundamentals of commodity options and their mechanism. Like any other derivative contract, commodity options are financial instruments based on an underlying asset. To keep it simple, commodity options trading means different choices to “Hold” the commodity today, so rather than purchasing or selling the commodity on today’s date, the decision has been deferred to a future date when the buying and selling of that commodity would take place. As underlying asset was mentioned earlier, there are various types, and it could be stock indices, forex, shares, commodity futures, commodities, debt instruments or bond indices.

When you sign an insurance contract with your insurance firm, you are bound to pay a premium as it will protect you from unexpected situations. Premium typically covers automobiles, life, fire or crops accidents. Similarly, options are also similar to these contracts as you will be required to pay a premium to safeguard yourself from unusual price movements. These are unique financial instruments offering the buyer their right but not the obligation to sell or purchase the underlying asset.

These instruments can be bought or sold at a certain price at or before a predetermined date for which the buyer must pay a premium. There are two situations for an options trade; the seller and buyer. The buyer has paid the premium to get the right to purchase whereas the seller received the premium to sell this right. He is also obligated to sell. If this right is exercised, the buyer would be called an option holder whereas the seller will be called an option writer. As insurance contracts have an expiry, and options are bound to expire date respectively. This is also known as maturity. As the options contract is near its maturity, the premium needed to be paid reduces.

The introduction of online commodity trading platforms means the platform is readily available to private investors. They can access global markets with a modest amount of funds. Undoubtedly, the commodities market is an emerging one and has huge potential to earn big profits. Commodity trading companies help new investors on commodity trading platforms by utilizing multiple methods to funds their financing activities. Different commodity trading firms employ various funding strategies which involve different ratios of debt maturities and debt types.

Just as there are several strategies to cook one vegetable in a variety of ways, there is an unlimited number of commodity option trading methods available in the commodities market. Any strategy you follow should be based on your appetite for risk or risk aversion and your personality. To put it simply, if you don’t have a high acceptance for pain, look for easiness, and aren’t an aggressive person (personality wise) then you should not be using a commodity futures trading strategy involving high risks.

If you still follow this strategy, the result will be an unexpected and ill-timed liquidation of trades, furthermore, other illogical emotional decisions may be taken as a result.

Probably, the best time to use options is during the intervals of extreme prices. Commodities markets coming-off long-standing lows or highs provides traders with an amazing opportunity. To be on the safe side, it is also vital to understand that if any commodity appears “cheap” in price is not an indication that its price will not decrease further. Similarly, it is not recommended for being bullish with a commodity option when the price is the highest.

Though, its prices may continue to increase but usually in such environments, options are highly overpriced. As price extremes can continue, they won’t remain high forever. Soon, market conditions will influence the price back towards the equilibrium state.

One should be cautious at extremely high or low price levels; sometimes a counter-trend trade might be beneficial. For example, during an all-time high situation, call options are going to be over-priced but put may be unexpectedly inexpensive. But again, it all depends on your risk appetite and personal situation.