The less time there is until expiry, the less value an option will have. This is because the chances of a price move in the underlying stock diminish as we draw closer to expiry. This is why an option is a wasting asset. If you buy a one-month option that is out of the money, and the stock doesn’t move, the option becomes less valuable with each passing day. Since time is a component to the price of an option, a one-month option is going to be less valuable than a three-month option. This is because with more time available, the probability of a price move in your favor increases, and vice versa.
Virtual Assistant is Fidelity’s automated natural language search engine to help you find information on the Fidelity.com site. As with any search engine, we ask that you not input personal or account information. Information that you input is not stored or reviewed for any purpose other than to provide search results. Responses provided by the virtual assistant are to help you navigate Fidelity.com and, as with any Internet search engine, you should review the results carefully. Fidelity does not guarantee accuracy of results or suitability of information provided.
As an example, let's say a farmer is expecting to produce 1,000,000 bushels of soybeans in the next 12 months. Typically, soybean futures contracts include the quantity of 5,000 bushels. The farmer's break-even point on a bushel of soybeans is $10 per bushel meaning $10 is the minimum price needed to cover the costs of producing the soybeans. The farmer sees that a one-year futures contract for soybeans is currently priced at $15 per bushel.
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.

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.
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.
In, At, or Out of the Money: If an option is in the money, its premium will have additional value because the option is already in profit, and the profit will be immediately available to the buyer of the option. If an option is at the money, or out of the money, its premium will not have any additional value because the options are not yet in profit. 
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.
Purchasing a call option is essentially betting that the price of the share of security (like a stock or index) will go up over the course of a predetermined amount of time. For instance, if you buy a call option for Alphabet (GOOG) at, say, $1,500 and are feeling bullish about the stock, you are predicting that the share price for Alphabet will increase. 

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.
Options markets trade options contracts, with the smallest trading unit being one contract. Options contracts specify the trading parameters of the market, such as the type of option, the expiration or exercise date, the tick size, and the tick value. For example, the contract specifications for the ZG (Gold 100 Troy Ounce) options market are as follows:
Decide whether you think a commodity will sell for more or for less at some designated time in the future, then buy either a “put” or a “call” option. For example, you think that corn will cost more three months from now than it does now, so you will buy a “call” option on 100 bushels of corn which, in effect, locks in the cost of that commodity. Before the option expires, hopefully the price will go up, so your option will be worth more. Conversely, you will buy a “put” option if you think the price of the commodity will be less than it is today.
Options markets trade options contracts, with the smallest trading unit being one contract. Options contracts specify the trading parameters of the market, such as the type of option, the expiration or exercise date, the tick size, and the tick value. For example, the contract specifications for the ZG (Gold 100 Troy Ounce) options market are as follows:

There are also exotic options, which are exotic because there might be a variation on the payoff profiles from the plain vanilla options. Or they can become totally different products all together with "optionality" embedded in them. For example, binary options have a simple payoff structure that is determined if the payoff event happens regardless of the degree. Other types of exotic options include knock-out, knock-in, barrier options, lookback options, Asian options, and Bermudan options. Again, exotic options are typically for professional derivatives traders.


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.
Decide whether you think a commodity will sell for more or for less at some designated time in the future, then buy either a “put” or a “call” option. For example, you think that corn will cost more three months from now than it does now, so you will buy a “call” option on 100 bushels of corn which, in effect, locks in the cost of that commodity. Before the option expires, hopefully the price will go up, so your option will be worth more. Conversely, you will buy a “put” option if you think the price of the commodity will be less than it is today.
A longer expiration is also useful because the option can retain time value, even if the stock trades below the strike price. An option’s time value decays as expiration approaches, and options buyers don’t want to watch their purchased options decline in value, potentially expiring worthless if the stock finishes below the strike price. If a trade has gone against them, they can usually still sell any time value remaining on the option — and this is more likely if the option contract is longer.
Disclaimer: NerdWallet has entered into referral and advertising arrangements with certain broker-dealers under which we receive compensation (in the form of flat fees per qualifying action) when you click on links to our partner broker-dealers and/or submit an application or get approved for a brokerage account. At times, we may receive incentives (such as an increase in the flat fee) depending on how many users click on links to the broker-dealer and complete a qualifying action.
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.

The fee you are paying to buy the call option is called the premium (it's essentially the cost of buying the contract which will allow you to eventually buy the stock or security). In this sense, the premium of the call option is sort of like a down-payment like you would place on a house or car. When purchasing a call option, you agree with the seller on a strike price and are given the option to buy the security at a predetermined price (which doesn't change until the contract expires). 
×