A sampling of terms defined includes: active premium, aggregation, angel financing, asset allocation, backwardation, benchmark, bridge loan, capital structure arbitrage, coefficient of determination, commodity option, convertible arbitrage, deferred futures, discretionary trading, distressed debt, enumerated agricultural commodities, extrinsic value, follow-on funding, hedge ratio, interdelivery spread, long short equity, modified value-at-risk, offshore fund, piggyback registration, social entrepreneurship, systematic trading, tracking error, underlying futures contract, venture capital method, and weather premium.
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.
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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.
The world of commodity options is diverse and cannot be given justice in a short article such as this. The purpose of this writing is to simply introduce the topic of options on futures. Should you want to learn commodity options trading strategies in more detail, please consider purchasing "Commodity Options" published by FT Press at www.CommodityOptionstheBook.com.
• Call Options – Give the buyer the right, but not the obligation, to buy the underlying at the stated strike price within a specific period of time. Conversely, the seller of a call option is obligated to deliver a long position in the underlying futures contract from the strike price should the buyer opt to exercise the option. Essentially, this means that the seller would be forced to take a short position in the market upon expiration.
When you buy an option, the risk is limited to the premium that you pay. Selling an option is the equivalent of acting as the insurance company. When you sell an option, all you can earn is the premium that you initially receive. The potential for losses is unlimited. The best hedge for an option is another option on the same asset as options act similarly over time.
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.
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Equity options today are hailed as one of the most successful financial products to be introduced in modern times. Options have proven to be superior and prudent investment tools offering you, the investor, flexibility, diversification and control in protecting your portfolio or in generating additional investment income. We hope you'll find this to be a helpful guide for learning how to trade options.
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Market expectations of commodity due to variations in demand and supply (If the market feels commodity may go up and traders are bullish about commodity, then forward prices are higher than forward parity price, whereas, if market feels that prices may go down then forward prices may be lesser) The expectations are mainly dependent on demand supply factoINR.
If you are buying an option that is already "in the money" (meaning the option will immediately be in profit), its premium will have an extra cost because you can sell it immediately for a profit. On the other hand, if you have an option that is "at the money," the option is equal to the current stock price. And, as you may have guessed, an option that is "out of the money" is one that won't have additional value because it is currently not in profit.