After Equity, commodities are the second biggest market for traders to bet or invest and earn some money with the price change in the different commodities. This practice gives the advantage of commodities prices fluctuations even without buying or selling the physical commodities, that needs additional storage and transportation cost.
Similarly, trading in the underlying commodities that are trading in the derivatives markets gives the traders more room for earning without investing huge amounts of money. Commodity Options Trading is the best way to trade in commodities with wide options to trade in different commodities with simple price fluctuations in the spot market.
Reviewing the Options Trading
Before you try to understand commodity options trading, let’s review what options trading or options contracts are traded in the derivatives market. Options are rights but not obligations to buy or sell an underlying security, commodity, currency or any investable instrument trading in the derivatives market.
The contracts are bought or sold, at a prefixed price that is also called the strike price, and there is a specific date the contract expires. And there are two types of options -American and European types options-according to that right to sell or buy can be exercised.
Also Read: Options Trading for Beginners
In American options, the buyer can choose to exercise the option at any time before the expiry of the option contract. While in European-style options, the buyer can choose to exercise the option only on the date of expiration of the contract.
And in India, as per the regulatory authority’s rules & norms, European-style commodity options are available for the people trading in the commodity.
What is Commodity Options Trading?
After the commodity future, commodity options became popular in the derivatives market where traders try their luck trading in the commodity market.
Just like any other traded investable underlying index or stock, commodity options trade in which the seller of the option has unlimited risk and the buyer limited risk.
Commodity futures & options provide traders with a wider market along with the opportunity to participate in the commodity markets. And just equity market, there are two types of options, a call option and a put option for commodity trading.
How Commodity Options Trading Works?
Incommodity options trading, there are buyers and sellers, when anyone buys the contracts, he has the right but no obligations to exercise the contract. Here, if traders consider the agreement profitable they can exercise the contract or leave for the expiration.
Also Read: Expiry Settlement Process (square off) in Commodity Market
However, if an options contract is purchased at a premium by the purchaser and if he chooses to exercise the contract, the seller must honour it. Because he is obligated, as while signing the contract, the seller has received the premium for the same.
Why Trade in Commodity Options?
Apart from equities or currencies, choosing commodity options for trading comes with various flexibility and advantages for traders. Trading in commodity options not only gives lucrative trading opportunities but also comes with advantages.
Low Capital Requirements: In commodity option trading you need to pay low margins, hence your capital investment is low trading in this market.
Low Transaction Cost: The transaction cost is also low in commodity options trading compared to equity and currency markets.
Limited Risk for the Buyers: Just like other underlying derivatives instruments, commodity options trading has limited risk for the contract buyers.
Various Trading Strategies: Depending on the market trends, you can trade choosing the multiple commodity strategies and enjoy maximum returns.
Extended Trading Hours: The equity market in India is 9:15 AM to 3:30 PM (IST),while the commodity market operates between 09:00 AM to 11:30 PM(IST) offering you extended trading hours giving the more time to take decisions and execute your transactions.
Effective Portfolio Diversification: Apart from top trading commodities from the segments like bullion, energy and base metals, you can trade in a wide range of other commodities through options, as per your risk-taking abilities and investment capabilities.
