An investor can make money trading commodities options in any type of market. A commodities option permits its purchaser to either buy or sell a commodity such as wheat or corn at a future date.
An investor purchases a “call option” if they believe the cost will go up in the future, and a “put option” if they believe that the cost of the commodity will fall. Commodities options allow you to profit from the rise and fall of the commodities market, without having to own the physical commodity.
Trading Commodities Options Brokerages
When you are trading commodities options, you will use a brokerage that trades through the CBOE (the Chicago Board Options Exchange), the world’s busiest and largest exchange. Prior to the opening of the Chicago Board Options Exchange, an investor was limited to investments such as bonds and equities that were traded on exchanges such as the NYSE and others.
It is important that an investor learns the difference between owning a commodity option and owning a commodity. When you own the commodity option, you own an instrument that will eventually expire, unlike owning the actual commodity. There is also no limit to the amount of existing options, which is unlike the limited nature of commodities.
Decide Your Position
An investor must then decide if they believe a commodity will sell for a higher price or for a lower price at some specified time in the future. You would then purchase either a “call” or a “put” option. As an example, if you believe that wheat will be priced higher in six months from now, you would purchase a “call” option on wheat. This option would, in effect, lock in the price of that commodity.
Prior to the option’s expiration, hopefully the price will increase in value, making your option worth more. On the other hand, you would purchase a “put” option if you believe that the cost of the commodity will be lower than its present level.
Pay The Premiums
You would then pay a “premium” on your commodity option. If you were to buy a “call” option on 100 bushels of corn, and the premium is $2 per bushel, you would pay $200 for the right to exercise your option until it expires.
This premium, as well as the commission you had to pay to your brokerage company is your only cost to purchase the commodities option. If you were to decide not to exercise the option prior to its expiration date, your total capital investment would be restricted to the $200 premium as well as commissions.
By trading commodities options you are limiting your initial capital investment, as well as positioning yourself to realize gains no matter which direction the market is heading. Keep in mind that all investments involve risk, and trading commodities options may not be suitable for every investment strategy. If you are in doubt as to whether these investment instruments are right for you, seek the advice of a broker or professional money manager.
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