Commodity option trading

In the recent past there has been a new technique introduced in the world of stock and commodity trading. This is what is known as options on futures contracts. Worldwide this is known to have brought in a new and exciting dimension to futures trading. Essentially options present price protection in case of any kind of contrary and unexpected price movements.

Commodity option trading was introduced in India, as it has been devised as a tool that to a large extent could preserve the existing fixed-income commodity portfolio, in terms of its value. This way the risk of losses is minimized.

 Thus, according to experts options can be regarded as an insurance, guarding the trader or investor against any unexpected reversed price fluctuations. And yet, if the price does unexpectedly does move in favor of the value of the portfolio then it provides flexibility to increase profits.

So, in short commodity option trading is defined by many as a means to minimize losses and maximize profits, as the situation may arise. Some of the suggested benefits of commodity option trading are listed here:

-An option trade of any commodity provides the purchaser with the permission to trade a defined amount of the commodity, at a defined price, within a defined time period.
-The trader is not confined by any restrictions to exercise the option, as it lays at his discretion, completely.
-The loss incurred by the buyer of the commodity option, will always stand limited to the amount he invested in the commodity.
-The commodity option purchaser is never constricted in any which ways by the margin calls, which enables them to sustain their market position.

There are certain primary terminologies that those indulging in commodity option trading should be completely aware of. They are listed as follows:

-Call option: This implies the purchaser’s right to purchase a defined futures contract, at a price pre-decided and within a specified amount of time
-Put option: This implies that the buyer has a right to sell a defined futures contract, at a price pre-decided and within a specified amount of time
-The holder: This is the purchaser of the commodity option
-Premium: This is the amount paid by the option purchaser to the seller
-Strike price: This is pre-decided price of a futures contract, at which it can be traded – bought or sold
-At-the-money: This is a situation that arises when the futures price is equal to, or almost equal to the strike price
-In-the-money: This is a situation that arises when the futures price exceeds the strike price.
-Out-of-the-money: This is a situation that arises when the futures price is lower than the strike price