Futures Options Trading can provide an Effective Strategy for Minimizing Risk in Commodities Trading
One of the ways commodities traders minimize the risks involved when dealing in commodities futures is to engage in futures options trading.
Unlike a straight futures contract, a futures option gives the trader the right to buy or sell a commodities contract at a predetermined price. Trading in futures options is an effective strategy to limit risk and leverage.
When a trader purchases a futures option, his losses are limited to the price paid for the option. On the other hand, it allows the trader to control a more expensive asset or commodity without having to purchase it outright, as is the case in a conventional futures contract.
There are two types of options available: “call,” and “put.” Call options give the holder the right to buy a commodity at a given price, while Put options give the right to sell the underlying commodity.
Essentially, the options holder has right to buy or sell, while the other party has the obligation to buy or sell. Call and put options can be exercised by the options holder before, or even during the contract expiration date.
Buying call options is a good move for traders who believe that the price for a particular commodity will rise within a certain period. Because they can choose not to exercise their right to buy, or exit the option before the contract ends, they run a much lower risk compared to a straight futures contract.
This is also true for traders buying Put options. If the price of a commodity falls below a certain strike price, they have the right to sell their commodity futures contract to a seller with minimal loss on their end.
While futures trading options can help minimize trade risks, it’s important to remember that on its way, options trading can still lead to a loss, particularly if a trader doesn’t use any other strategies to complement their trading.
In order to be in a better position to profit from the commodities market, it’s important to do keep updated on emerging market trends and events. Novice traders, in particular, will greatly benefit from broker-assisted trading services offered by trusted firms.
There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past performance is not indicative of future results.
Category: Commodity Prices
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