Worried about the risk that comes with trading commodity futures? Would you prefer that,
with every single trade you made, you knew the most that you could lose, and that this amount was
fixed, bottom-line, and no-matter-what the absolute most that you could lose? If so, then buying options on commodity futures may be for you.
Buying options on commodity futures has the chief advantage of allowing you to profit from favorable moves in prices while at the same time, limiting your risk to the amount paid for the option plus commission and other transaction fees. For example, if you pay $500 for an option
(including all fees), then this is the most that you can lose - no matter what. This fixed downside loss
is of great appeal to those who who have limited trading funds or who desire less risk than, say, trading commodity futures.
If you think that prices will increase, then you will buy a call option. If you think that prices will decline,
then you will buy a put option. If, after buying an option, prices move your way, then your commodity option will
increase in value, meaning that you'll be making money and, should prices ever move against you,
your absolute loss will be limited to what you paid for the commodity option.
Options exist on many commodities such as cotton, sugar, and crude oil,
and on currencies such as the Canadian dollar and the Euro, and on broad stock market indices such as the
S&P 500. Each of these is a commodity futures contract and you will buy a call or put option on that futures contract.
Don't be confused by this. It simply means that you need to look at the price of the commodity futures contract
as this is the price on which the option is based. You can find free charts of commodity futures prices on the blue navigation
bar on the home page. Just click on Trader's Tools under the miscellaneous heading. Options on commodity futures can also
be referred to as commodity options.
It will take a bit of time to understand commodity options, but the investment is well worth it. After all, education is a key to
successful trading. We compiled this Options on Commodity Futures Learning Center to get you started on the
right foot. Educating traders is what we do.
Your next step...
After reading the information in this Options on Commodity Futures Learning Center, your next step should be the Learning Curve.
There you will find more advanced articles including: Buying Commodity Options, Which Commodity Option to Buy?,
Understanding Commodity Option Prices, and How Commodity Options are Treated in the Account Statement. It's all free. You may also
want to request an Options on Futures POWER PACK.
It covers the basic of options on futures and continues on to more advanced option strategies to fit any
market scenario. And it's free.