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Commodity Options Trading: How to Trade & Top Strategies


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.

Also Read: Currency Trading: What is Forex Trading & How Does it Work

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.

Also Read: Types of Commodities for Trading & Risk in Commodity Market

Commodity Options Trading Example

Understanding commodity options trading would be easier if we take an example and explain to you how commodity options trading works.

Suppose you choose Gold for options trading in commodity, and expect the price of gold futures currently trading at Rs.1500 per lot, likely to fall. You buy a one-month Gold Call Option at the strike price of Rs.1150 and paid the premium of Rs. 50 to underwrite the options contract.

Now option contract expiry date arrives, you find that your speculation is right. As you signed the contract to buy at low, and with the market changes, current price of the 1-month gold futures trades is greater than Rs.1150 at Rs 1350 per lot.

Now at this price, you can exercise your buying rights and convert the options to a one-month futures contract at the strike price, with a net profit of Rs 200. When the strike price of the contract is lower than current market prices it is called In-The-Money (ITM). In such situations, the underwriter of the option is obligated to honour the option contract.

In another situation, if market price of 1-month gold futures trading at less than the strike price of Rs.1150, just consider maybe somewhere around Rs. 1000. Here you can opt to exercise your right to buy option at this strike price.

However, if you choose not to exercise the contract, it will be expired and become worthless. Here in this situation, you will lose the premium amount that you paid at the time of underwriting the contract.

And not only buy a single contract of commodity CALL option, instead you can also buy the commodity PUT options at the same time in combination with any strike price to hedge your position and minimize the loss.

And this is called the strategy to cover your options to maximize your profits and minimize the loss if the commodity price does not respond as per your expectations or moves either side.

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    Commodity Options Trading Strategies

    Trading in options either equities or commodities, the strategies work effectively in both segments. But you can apply the commodity option strategy depending on the market conditions or trend that is running in the commodity market globally.

    However, we have mentioned here a few popular options strategies that are also applicable in the commodity market with similar outcomes.

    Single Position: As the name shows, in this options strategy, you can either make either long positions in Call or Put. Or you can short (sell) Put or Call.

    Spread Positions: In the spread position, you can create four different types of combinations of positions. Bull Call Spread, in which buy low/sell high or Bear Put Spread in which buy high/sell low.

    In another combination under this strategy, you can create Bear Call Spread in which you can buy high/sell low. While in Bull Put Spread you can buy low/sell high.

    Straddle or Strangle Positions: To trade in the commodity option market you can follow this strategy in which you have to Short Call and Short Put. And this strategy can be applied even when the exercise prices of the call and put options differ.

    Combination of Options & Futures Positions: This could be quite an expensive strategy as it requires high investment due to a diverse combination of Long futures and short calls, or Short futures and short puts to hedge your position for a safe bet.

    Conversion & Reverse Conversion: If you follow this strategy, under the conversion method you have to long put and short call. While in Reverse Conversion you can hold a long call and short put that can give you the best returns in a favorable market.

    Also Read: Future & Options Trading Strategies

    How to Trade Commodity Options Trading?

    To start trading in commodity options you need a trading account for the commodity segment. And to open a trading account for commodity trading you can choose the right platform. Many online platforms are claiming to offer trading accounts for commodities, but make sure to choose the right one that offers you transparent fees and trading charges.

    As many online platforms or brokers offer free trading account facilities but have hidden charges that they imply after opening the trading account or when customers make their positions in commodity options to trade.

    Also Read: Trading Account: Types & How to Open a Trading Account

    Commodity Options Trading Platform

    Many online as well as offline commodity options trading platforms offer trading in the commodity market. But here you have to choose the right one that suits your needs – whether you like to trade, offline or via phone call to your broker, online using the computer or looking to trade through an app on your smartphone.

    Here, Moneysukh can offer you flexible trading facilities, that you can choose as per your customized needs. It is offering the all-in-one facility to open a trading account and trade through multiple devices accessible through the single login credentials.

    Commodity Options Trading Brokers

    You can find multiple brokers providing the facilities for trading in the commodity market. But choosing the right one would be a difficult task for you. But don't worry about that, Moneysukh can offer you seamless trading facilities for the commodity market.

    Apart from cross-functional online platforms for retail customers, it is also offering tips and recommendations to its customers to trade in the commodity market and gain maximum profits. Moneysukh is charging the minimum brokerage in the industry and also offers the maximum margins to its customers who trade into commodity options.

    Commodity Options Trading in India

    In India, MCX is the exchange providing trading facilities in commodities through its members of course, called brokers where retail clients can open a trading account and enjoy trading in various commodities listed on the MCX exchange.

    Apart from the future contract, MCX also provide full-fledged options contracts to trade in the commodities through the derivatives market.

    Final Words about Commodity Options Trading

    The commodity market is quite different from the equity and currency markets. It has its advantages and disadvantages but if you trade wisely and earn money, this could be one of the best ways to maximize your wealth through the commodity market.

    One of the best advantages of options trading commodity market is, options give you the benefits of trading with huge margins and that is only paying a small portion of price. The derivatives market can help to reproduce cash market positions only at very much smaller upfront payments.

    However, trading in this market could be very risky as the commodity options market is highly volatile that attracts limited people. But if you trade cautiously with the help of commodity market experts you can earn a handsome amount of profits at least cost.

    Moneysukh, will not only provide the one-stop online solution for equity, currency and commodity trading with cutting-edge technology supported by highly secured platforms and backed by the well-qualified, skilled and experienced analysts helping the customers choose the right instruments or trade with the most profitable strategies and enjoy the best returns

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