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.