Posted on 20 September 2011.
Commodity futures and options are contracts that are undertaken by traders. These contracts specify the delivery date and price of specific commodities. Each party, buyer and seller, involved in this purchase must put up a certain amount of money as a margin. However, there are aspects to commodity futures and options which distinguish the two from one another.
A commodity is any raw material that can be traded on an exchange. There is a wide variety of commodities. They can be agricultural products, metal ores, energy resources, or anything else that is not a manufactured good. Traditional stocks differ from commodities in many ways. Stocks, for example, represent shares in a business. Commodities represent actual quantities of goods that are delivered all over the world to industries on a daily basis.
Commodities can be traded in a number of ways. One popular form of commodity-trading involves the contracts known as commodity futures. When a trader buys a commodity future, he or she buys a contract which obligates the holder to deliver a certain quantity of commodities at a specified time and at a specified price.
A commodity option is similar to a commodity future. An option secures the buyer the right, but not the contractual obligation, to buy a specific quantity of a commodity at a set time and a set price. The holder of a commodity option is not required to buy that commodity when the contract reaches maturity.
One of the worst risks that farmers endure is the falling price of their crop. Commodity futures and options act as a form of insurance in these situations. That insurance applies to all commodities. Through commodity futures and options investors have a form of security in regard to the products in which they invest.
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