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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.
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.
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.
Contract Months (Time): All options have an expiration date; they only are valid for a particular time. Options are wasting assets; they do not last forever. For example, a December corn call expires in late November. As assets with a limited time horizon, attention must be accorded to option positions. The longer the duration of an option, the more expensive it will be. The term portion of an option's premium is its time value.
The price you pay for an option, called the premium, has two components: intrinsic value and time value. Intrinsic value is the difference between the strike price and the share price, if the stock price is above the strike. Time value is whatever is left, and factors in how volatile the stock is, the time to expiration and interest rates, among other elements. For example, suppose you have a $100 call option while the stock costs $110. Let’s assume the option’s premium is $15. The intrinsic value is $10 ($110 minus $100), while time value is $5.

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.


Unlike other investments where the risks may have no boundaries, options trading offers a defined risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the option contract are not met by the expiration date. An uncovered option seller (sometimes referred to as the uncovered writer of an option), on the other hand, may face unlimited risk.
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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:
When purchasing put options, you are expecting the price of the underlying security to go down over time (so, you're bearish on the stock). For example, if you are purchasing a put option on the S&P 500 index with a current value of $2,100 per share, you are being bearish about the stock market and are assuming the S&P 500 will decline in value over a given period of time (maybe to sit at $1,700). In this case, because you purchased the put option when the index was at $2,100 per share (assuming the strike price was at or in the money), you would be able to sell the option at that same price (not the new, lower price). This would equal a nice "cha-ching" for you as an investor.
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