Finding The Best Commodity Options To Invest In – Things To Consider

By Author: Maithili Pawar
Total Articles: 15
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In this day and age of inflation, investing in conservative instruments like fixed or recurring deposits or even shares and mutual funds is no longer enough. If you wish to profit from your investments at a quicker pace, you need to consider different high-risk investment instruments like intra-day trading, currency trading and even stock indices. You may also consider investing commodities real time futures and options where you can profit from hedging price fluctuations of underlying assets and by speculating the trade. Between futures and options, the latter is regarded as a safer investment option. Here are a few things to need to know about commodity option trading.

What is commodity option trading?

Members of the commodity market enter into contracts detailing the terms for buying and selling commodities, also known as underlying assets. As per this contract, traders can buy or sell underlying commodities at a predetermined, specific price on or before a fixed date in future. Buyers in this market have the right, but not the obligation to buy or sell the commodity at the fixed price on the fixed date. These decisions are taken based on the fluctuating prices of commodities in the commodity market. A good way to profit from your investment is to invest in the active options.

Finding the best options to trade

There are a few things to consider while you try to find the best and the most active options to invest in. They are as under

• Exercising the call option
As an investor trading in options, you can exercise your call option if needed. The call option serves as the best options to trade, in the event that the prices of commodities are rising. This option provides you the right to purchase the commodities at a predetermined price in future, thus allowing you to book profits, especially if you’ve placed the right bets and the price of the commodity increases.

• Exercising the put option
A put option, on the other hand should be exercised when you expect the prices of the commodity to fall in future. Investors dealing with option trading typically use the put option as a hedging strategy against fluctuating prices. If the price of the commodity you’ve purchased rises, you can exercise the put option and if the price falls, you have the choice of not selling the commodity, thereby avoiding any losses.

• Considering the premium
In order to find the most active options to trade in, you should also consider the premium that you need to pay while entering into a commodity options contract. The premium you have to pay is determined on the basis of several different factors including the price of the commodity, its volatility, the contract expiration time and so on and so forth. You need to consider whether or not your investment will make you any money if you choose to sell it off intermittently. The premium amount is simply a percentage of your transaction, which can affect the returns you could potentially earn as well as the leverage you could get. Leverage is defined as the extent to which you can buy options.

Final word: While commodity option trading is a little less risky because you can exercise the call (buy) and put (sell) options before the options contract expires; commodity futures trading is a little more risky. That said, the profits you stand to earn from trading in commodity futures are higher than what you can earn form commodity option trading. However, you must consider your risk appetites before you venture into either type of trade.