Options on futures contracts are exactly what the name implies, they give traders "options". They are capable of being used in nearly every commodity market scenario and with variable risk and reward profiles. Too many traders fail to tap the true potential and flexibility of option spreads due to their seemingly complex nature; however, things aren't always as they appear. We strongly believe that you owe it to yourself to overcome your fear of trading commodity options and open your mind to the possibilities.
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Whether the economy is hot or not, an investor can make money trading commodity options, regardless of the condition of the market. Briefly, a commodity option allows its owner to either sell or buy a commodity like corn or wheat at a future date. You will buy a so-called “put option” if you think the price of the commodity will go down and a “call option” if you think the price will rise. And never will you have to take possession of the commodity itself.
There’s another potential problem if you base your decision solely on commissions. Discount brokers can charge rock-bottom prices because they provide only bare-bones platforms or tack on extra fees for data and tools. On the other hand, at some of the larger, more established brokers you’ll pay higher commissions, but in exchange you get free access to all the information you need to perform due diligence.
Pay a “premium” wherever you buy a commodity option. Let's say you purchase a “call” option on 100 bushels of corn, and the premium is $2 per bushel. You will pay $200 for the right to exercise your option until it expires. That is your only cost to purchase the option, except for whatever commission you had to pay to your brokerage company. Even if you choose not to exercise the option before it expires, your investment will be limited to the $200 premium plus commission.
When buying a call option, the strike price of an option for a stock, for example, will be determined based on the current price of that stock. For example, if a share of a given stock (like Amazon (AMZN) ) is $1,748, any strike price (price of the call option) that is above that share price is considered to be "out of the money." Conversely, if the strike price is under the current share price of the stock, it's considered "in the money." 

Similarly, if you believe the company’s share price is going to dip to $80, you’d buy a put option (giving you the right to sell shares) with a strike price above $80 (ideally a strike price no lower than $80 plus the cost of the option, so that the option remains profitable at $80). If the stock drops below the strike price, your option is in the money.
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)

* Sell orders are subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). Trades are limited to online domestic equities and options and must be used within two years. Options trades are limited to 20 contracts per trade. Offer valid for new and existing Fidelity customers opening or adding net new assets to an eligible Fidelity IRA or brokerage account. Deposits of $50,000-$99,999 will receive 300 free trades, and deposits of $100,000 or more will receive 500 free trades. Account balance of $50,000 of net new assets must be maintained for at least nine months; otherwise, normal commission schedule rates may be retroactively applied to any free trade executions. See Fidelity.com/ATP500free for further details and full offer terms. Fidelity reserves the right to modify these terms and conditions or terminate this offer at any time. Other terms and conditions, or eligibility criteria may apply.
Research is provided for informational purposes only, does not constitute advice or guidance, nor is it an endorsement or recommendation for any particular security or trading strategy. Research is provided by independent companies not affiliated with Fidelity. Please determine which security, product, or service is right for you based on your investment objectives, risk tolerance, and financial situation. Be sure to review your decisions periodically to make sure they are still consistent with your goals.
In terms of valuing option contracts, it is essentially all about determining the probabilities of future price events. The more likely something is to occur, the more expensive an option would be that profits from that event. For instance, a call value goes up as the stock (underlying) goes up. This is the key to understanding the relative value of options.
The potential home buyer would benefit from the option of buying or not. Imagine they can buy a call option from the developer to buy the home at say $400,000 at any point in the next three years. Well, they can—you know it as a non-refundable deposit. Naturally, the developer wouldn’t grant such an option for free. The potential home buyer needs to contribute a down-payment to lock in that right.
For example, if you bought a long call option (remember, a call option is a contract that gives you the right to buy shares later on) for 100 shares of Microsoft stock at $110 per share for December 1, you would have the right to buy 100 shares of that stock at $110 per share regardless of if the stock price changed or not by December 1. For this long call option, you would be expecting the price of Microsoft to increase, thereby letting you reap the profits when you are able to buy it at a cheaper cost than its market value. However, if you decide not to exercise that right to buy the shares, you would only be losing the premium you paid for the option since you aren't obligated to buy any shares. 
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)
The contract specifications are specified for one contract, so the tick value shown above is the tick value per contract. If a trade is made with more than one contract, then the tick value is increased accordingly. For example, a trade made on the ZG options market with three contracts would have an equivalent tick value of 3 X $10 = $30, which would mean that for every 0.1 change in price, the trade's profit or loss would change by $30.
On the other hand, commodity option buyers are exposed to limited risk and unlimited profit potential, but they also face dismal odds of success on each individual speculation. For this reason, we often refer to the practice of buying options in the commodity markets as the purchase of a lottery ticket. It probably won’t pay off but if it does the potential gain is considerable. Conversely to the commodity option seller, an option buyer views the position as an asset (not a liability) until it is sold or expires. This is because any long option held in a commodity trading account has the potential to provide a return to the trader, even if that potential is small.
Trading in commodity futures contracts can be very risky for the inexperienced. The high degree of leverage used with commodity futures can amplify gains, but losses can be amplified as well. If a futures contract position is losing money, the broker can initiate a margin call, which is a demand for additional funds to shore up the account. Further, the broker will usually have to approve an account to trade on margins before they can enter into contracts.
However, unless soybeans were priced at $15 per bushel in the market on the expiration date, the farmer had either gotten paid more than the prevailing market price or missed out on higher prices. If soybeans were priced at $13 per bushel at expiry, the farmer's $15 hedge would be $2 per bushel higher than the market price for a gain of $2,000,000. On the other hand, if soybeans were trading at $17 per bushel at expiry, the $15 selling price from the contract means the farmer would have missed out on an additional $2 per bushel profit.

Fluctuations in option prices can be explained by intrinsic value and extrinsic value, which is also known as time value. An option's premium is the combination of its intrinsic value and time value. Intrinsic value is the in-the-money amount of an options contract, which, for a call option, is the amount above the strike price that the stock is trading. Time value represents the added value an investor has to pay for an option above the intrinsic value. This is the extrinsic value or time value. So, the price of the option in our example can be thought of as the following:
Just as there are several ways to skin a cat, there are an unlimited number of option trading strategies available in the futures markets. The method that you choose should be based on your personality, risk capital and risk aversion. Plainly, if you don't have an aggressive personality and a high tolerance for pain, you probably shouldn't be employing a futures and options trading strategy that involves elevated risks. Doing so will often results in panic liquidation of trades at inopportune times as well as other unsound emotional decisions.
Time Value: All options contracts have an expiration date, after which they become worthless. The more time that an option has before its expiration date, the more time there is available for the option to come into profit, so its premium will have additional time value. The less time that an option has until its expiration date, the less time there is available for the option to come into profit, so its premium will have either lower additional time value or no additional time value.
Options are available as either a Call or a Put, depending on whether they give the right to buy, or the right to sell. Call options give the holder the right to buy the underlying commodity, and Put options give the right to sell the underlying commodity. The buying or selling right only takes effect when the option is exercised, which can happen on the expiration date (European options), or at any time up until the expiration date (US options).

The purchase of a call option is a long position, a bet that the underlying futures price will move higher. For example, if one expects corn futures to move higher, they might buy a corn call option. The purchase of a put option is a short position, a bet that the underlying futures price will move lower. For example, if one expects soybean futures to move lower, they might buy a soybean put option.
Options on futures began trading in 1983. Today, puts and calls on agricultural, metal, and financial (foreign currency, interest-rate and stock index) futures are traded by open outcry in designated pits. These options pits are usually located near those where the underlying futures trade. Many of the features that apply to stock options apply to futures options.
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. 
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