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The Basics of Learning How to Trade Commodity Options

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How to Trade Commodity Options for Beginners

how to trade commodity optionsLearning how to trade commodity options is a great opportunity. Trading options provides more flexibility and risk management than trading on the commodity itself.  To understand commodity options, you need to understand commodities and options by themselves. Once this is accomplished, everything will make better sense.

How Options Work

How to trade commodity options is vastly different from trading paper currency or trading commodities. A stock option is the option to buy. You purchase the ability to buy or sell the stock if it rises above a set rate by a designated date. Call options give investors the right to buy the option, while put options give you the right to sell it. There are no margin requirements for buying, because the risk is limited to the price of the option. Selling an option, however, does require a margin. The price of an option is referred to as the premium. There are other terms that you will need to become familiar with, as well, before growing comfortable trading options.

How Commodities Work

Commodities are real goods that are traded based upon current market values. Learning how to trade commodity options involves considering similar aspects of the product’s value. Instead of investing based upon how you believe a business or company will perform, you buy commodities based on how you believe that good will be valued in the future. Examples of commodities include livestock, crops, mined metals and minerals, and other resources. Gold, corn, cattle, and oil are commonly traded commodities.

How to Trade Commodity Options

Once you grasp the concepts of both options and commodities’, putting it all together is simple. When you learn how to trade commodity options, you are learning to buy an option based upon a designated premium for the commodity, which must be reached by the expiration date. For example, you might have a contract to buy an option if the price of coffee per pound reaches a certain amount by the set date.

How to Trade commodity options can be a complicated form of trading. It is best not to attempt option trading until you have become comfortable with standard stock trading. Even then, it can be difficult to learn all of the intricacies of the world of options. With research and study, you can learn how to trade commodity options with success.

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