For example: A steel manufacturer importing coal from Australia currently and in order to reduce the volatility of changes in prices he always hedges the coal purchases on a 3 monthly forward contract where he agrees with the seller on day one of financial quarter to supply coal at defined price irrespective of price movements during quarter. So in this case, the contract is forward/future and buyer has an intention to buy the goods and no intention of making profit from price changes.
In search of a promising commodity option trade, it is important to look at whether or not the options are priced fairly. Option prices fluctuate according to supply and demand in the underlying commodity market. At times, options on futures prices become inflated or undervalued relative to theoretical models such as Black and Scholes. For example, during the "crash" of 2008 the value of put options exploded as traders scrambled to buy insurance for their stock portfolios or simply wanted to wager that the equity market would go down forever. The increase in option premium was partly due to inflated volatility but increased demand for the instruments had a lot to do with it. Those that chose to purchase put options at inopportune times and at overvalued prices, likely didn't fair very well.
A commodity market is a market that trades in primary economic sector rather manufactured products.  Soft commodities are agriculture products such as Wheat, coffee, sugar and cocoa. Hard commodities are mined products such as gold and oil. Future contracts are the oldest way of investing in commodities. Futures are secured by physical assets. Commodity market can includes physical trading in derivatives using spot prices, forwards, futures and options on futures. Collectively all these are called Derivatives.
Especially when using a custom view, you may find that the number of columns chosen exceeds the available space to show all the data. In this case, the table must be horizontally scrolled (left to right) to view all of the information. To do this, you can either scroll to the bottom of the table and use the table's scrollbar, or you can scroll the table using your browser's built-in scroll:
Sometimes corporations enter the forex market in order to hedge their profits. A US company with extensive operations in Mexico, for example, may enter into a futures contracts on US dollars. So, when it comes time to bring those Mexican profits home, the profits earned in pesos will not be subject to unexpected currency fluctuations. The futures contract is a way of securing an exchange rate and eliminating the risk that peso will lose value versus the dollar, making those profits worth less in dollars.

worked as JPMorgan Equity Analyst, ex-CLSA India Analyst ; edu qualification - engg (IIT Delhi), MBA (IIML); This is my personal blog that aims to help students and professionals become awesome in Financial Analysis. Here, I share secrets about the best ways to analyze Stocks, buzzing IPOs, M&As, Private Equity, Startups, Valuations and Entrepreneurship.
For example: A trader in October 2016 agrees to deliver 10 tons of steel for INR 30,000 per ton in January 2017 which is currently trading at INR 29,000 per ton.  In this case, trade is assured because he got a buyer at an acceptable price and a buyer because knowing the cost of steel in advance reduces uncertainty in planning. In this case, if the actual price in January 2017 is INR 35,000 per ton, the buyer would be benefitted by INR 5,000 (INR 35000-INR 30,000). On the other hand, if the price of steel becomes INR 26,000 per ton then the trader would be benefitted by INR 4,000 (INR 30,000- INR 26000)
As an example, let's say an initial margin amount of $3,700 allows an investor to enter into a futures contract for 1,000 barrels of oil valued at $45,000—with oil priced at $45 per barrel. If the price of oil is trading at $60 at the contract's expiry, the investor has a $15 gain or a $15,000 profit. The trades would settle through the investor's brokerage account crediting the net difference of the two contracts. Most futures contracts will be cash settled, but some contracts will settle with the delivery of the underlying asset to a centralized processing warehouse.
Now, think of a put option as an insurance policy. If you own your home, you are likely familiar with purchasing homeowner’s insurance. A homeowner buys a homeowner’s policy to protect their home from damage. They pay an amount called the premium, for some amount of time, let’s say a year. The policy has a face value and gives the insurance holder protection in the event the home is damaged.
worked as JPMorgan Equity Analyst, ex-CLSA India Analyst ; edu qualification - engg (IIT Delhi), MBA (IIML); This is my personal blog that aims to help students and professionals become awesome in Financial Analysis. Here, I share secrets about the best ways to analyze Stocks, buzzing IPOs, M&As, Private Equity, Startups, Valuations and Entrepreneurship.

As an example, let's say an initial margin amount of $3,700 allows an investor to enter into a futures contract for 1,000 barrels of oil valued at $45,000—with oil priced at $45 per barrel. If the price of oil is trading at $60 at the contract's expiry, the investor has a $15 gain or a $15,000 profit. The trades would settle through the investor's brokerage account crediting the net difference of the two contracts. Most futures contracts will be cash settled, but some contracts will settle with the delivery of the underlying asset to a centralized processing warehouse.

Commodity options provide a flexible and effective way to trade in the futures markets. Further, options on futures offer investors the ability to capitalize on leverage while still giving them the ability to manage risk. For example, through the combination of long and short call and put options in the commodity markets, an investor can design a trading strategy that fits their needs and expectations; such an arrangement is referred to as an option spread. Keep in mind that the possibilities are endless and will ultimately be determined by a trader's objectives, time horizon, market sentiment, and risk tolerance.

With options markets, as with futures markets, long and short refer to the buying and selling of one or more contracts, but unlike futures markets, they do not refer to the direction of the trade. For example, if a futures trade is entered by buying a contract, the trade is a long trade, and the trader wants the price to go up, but with options, a trade can be entered by buying a Put contract, and is still a long trade, even though the trader wants the price to go down. The following chart may help explain this further:
So, call options are also much like insurance - you are paying for a contract that expires at a set time but allows you to purchase a security (like a stock) at a predetermined price (which won't go up even if the price of the stock on the market does). However, you will have to renew your option (typically on a weekly, monthly or quarterly basis). For this reason, options are always experiencing what's called time decay - meaning their value decays over time. 
×