* 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.
In Economics, a commodity is a marketable item produced to satisfy wants or needs. The commodity is generally Fungible (Fungibility is the property of a good or commodity whose individual units are capable of being substituted in place of one another). For example, since one ounce of pure gold is equivalent to any other ounce of pure gold, gold is fungible. Other fungible goods are Crude oil, steel, iron ore, currencies, precious metals, alloy and non-alloy metals.
Investing with options— an advanced trader will tell you— is all about customization. Rewards can be high — but so can the risk— and your choices are plenty. But getting started isn’t easy, and there is potential for costly mistakes. Here’s a brief overview of option trading that cuts through the jargon and gets right to the core of this versatile way to invest.
All investors should know how to trade options and have a portion of their portfolio set aside for option trades. Not only do options provide great opportunities for leveraged plays; they can also help you earn larger profits with a smaller amount of cash outlay. What’s more, option strategies can help you hedge your portfolio and limit potential downside risk.
A long options trade is entered by buying an options contract and paying the premium to the options seller. If the market then moves in the desired direction, the options contract will come into profit (in the money). There are two different ways that an in the money option can be turned into realized profit. The first is to sell the contract (as with futures contracts) and keep the difference between the buying and selling prices as the profit. Selling an options contract to exit a long trade is safe because the sale is of an already owned contract.
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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.
In case of futures, a buyer of a contract is said to be “long position holder” and a seller is “Short position holder”. In the case of futures, to avoid the risk of defaulting contract involves both parties lodging a certain percentage margin of value of contract with a mutually trusted third party. Generally, in gold futures trading, margin varies between 2%-20% depending on the volatility of gold in spot market.
Volatility: If an options market is highly volatile (i.e. if its daily price range is large), the premium will be higher, because the option has the potential to make more profit for the buyer. Conversely, if an options market is not volatile (i.e. if its daily price range is small), the premium will be lower. An options market's volatility is calculated using its long-term price range, its recent price range, and its expected price range before its expiration date, using various volatility pricing models.
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What if, instead of a home, your asset was a stock or index investment? Similarly, if an investor wants insurance on his/her S&P 500 index portfolio, they can purchase put options. An investor may fear that a bear market is near and may be unwilling to lose more than 10% of their long position in the S&P 500 index. If the S&P 500 is currently trading at $2500, he/she can purchase a put option giving the right to sell the index at $2250, for example, at any point in the next two years.
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.
For example: Tomatoes are cheap in July and will be expensive in January, you can’t buy them in July and take delivery in January, since they will spoil before you can take advantage of January’s high prices. The July price will reflect tomato supply and demand in July. The forward price for January will reflect the market’s expectations of supply and demand in January. July tomatoes are effectively a different commodity from January tomatoes.
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.
According to Nasdaq's options trading tips, options are often more resilient to changes (and downturns) in market prices, can help increase income on current and future investments, can often get you better deals on a variety of equities and, perhaps most importantly, can help you capitalize on that equity rising or dropping over time without having to invest in it directly.