The Benefits of Trading Commodity Options Over Futures Trading

Breaking down commodity options with options guru, Bernie Schaeffer

Jan 12, 2021 at 11:00 AM
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    The primary difference between a futures contract and a commodity option contract is that a futures contract obligates a trader to buy or sell the underlying commodity. Along with this, commodity options require the payment of premiums, whereas futures contract does not. Commodity options also provide traders with limited risk, something that futures contracts do not guarantee.

    As far as a margin account is concerned in commodity options trading, only the writer, or seller, of the option has to maintain a margin account. Alternatively, both parties signing a futures contract are required to maintain a margin account. A margin account can be understood as a means of storing collateral required prior to trading commodity options.

    The commodity options market has high-reward potential, but trading options on commodities is also a high-risk endeavor that should only be taken with proper education and support from a professional. The biggest advantage that a trader will benefit from while engaging in trading commodity options is the protection offered from the risk of price fluctuations of the commodity. The commodity derivatives market is highly volatile. It can be impacted by not only the country's internal circumstances, but is very often also impacted by global circumstances as well. In such a market, a trader may have an opportunity to earn substantial profits, but the risk of taking on a significant loss always looms as a possibility this this type of trading. Through trading commodity options, traders can hedge the pricing risks in both directions.

    Especially during times of high inflation, commodity options trading will not only secure a trader's portfolio, but will also allow a trader to take large profits from each trade. The most profitable commodities traded in the U.S. are oil, steel, and soybeans. If you are a confident equity options trader, there are plenty of stocks and ETFs that allow you to trade the commodities market without having to step outside of the world of equities.

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