Commodity Option Trading

Commodity option trading comes with its own advantages and can be extremely profitable if done correctly. In general trading commodity options is a lot like trading stock options. Each option will give the buyer the right to buy or sell a contract at a specific price, while at the same time it will give the seller the obligation to sell or buy that contract at a specific price.

There are only a few major differences. The first one being the number of contacts each option will buy. In the stock market each option represents 100 shares of stock. So if you buy 10 options you control 1000 shares of stocks.

In the commodity futures market each commodity is much different. One commodity may offer options buying 1000 contracts or it may offer the option to buy 50 contracts, so doing your homework before entering a trade is very important.

Advantages For Option Sellers

If you are selling options then a commodity option will be able to let you do more with less than a stock option would. This is because commodity options follow the SPAN (standard portfolio analysis of risk) margin rules created by the Chicago Mercantile Exchange.

Unlike stock options which looks at each individual trade separately and determines your margin based on that trade a SPAN takes into consideration your entire trading account. SPAN looks at things such as time, volatility, price of the stock, and other open positions to determine the worst possible one day move your account can take. The result, much less money is withheld whenever you sell options.

That could help an investor get even more out of their account then they would be able to otherwise. However, just because you are able to trade more positions in commodity futures does not mean you should. Keeping risk small is still one of the biggest keys to success when it comes to trading, so be wise about it.

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