Strike Price: This is the price at which you could buy or sell the underlying futures contract. The strike price is the insurance price. Think of it this way: The difference between a current market price and the strike price is similar to the deductible in other forms of insurance. As an example, a December $3.50 corn call allows you to buy a December futures contract at $3.50 anytime before the option expires. Most traders do not convert options to futures positions; they close the option position before expiration.
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.
In our opinion, commodity markets coming off of long-term highs or lows typically present traders with an extraordinary prospect. However, it is important to realize that just because a commodity seems "cheap" doesn't mean that it can't go lower. Likewise, while we would never advocate buying (or being bullish with options) a commodity at an all time high, it is always possible that prices can continue higher but generally speaking options in such an environment are over-priced. As a result, they come with magnificently low odds of success.
In order to trade options, you’ll need a broker. Check out our detailed roundup of the best brokers for options traders, so you can compare commission costs, minimums, and more, as well as our explainer on how to open a brokerage account. Or stay here and answer a few questions to get a personalized recommendation on the best broker for your needs.
Options are contracts giving the owner the right to buy or sell an asset at a fixed price (called the “strike price”) for a specific period of time. That period of time could be as short as a day or as long as a couple of years, depending on the option. The seller of the option contract has the obligation to take the opposite side of the trade if and when the owner exercises the right to buy or sell the asset. For more information, check out the Ally Invest Options Playbook here: https://www.optionsplaybook.com/
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 years, the preferred method of trading options was to use a live broker with a securities firm because you would receive all the research you would need to make a judgment. But with the advances made by online brokerage companies in being able to provide you with that information, more people are trading commodity options online than ever before and they are paying a fraction of the commissions they would otherwise pay to a live broker. Since you will have more trades than you would if you were simply buying stock, you will have more money in your account.
Speculation is a wager on future price direction. A speculator might think the price of a stock will go up, perhaps based on fundamental analysis or technical analysis. A speculator might buy the stock or buy a call option on the stock. Speculating with a call option—instead of buying the stock outright—is attractive to some traders since options provide leverage. An out-of-the-money call option may only cost a few dollars or even cents compared to the full price of a $100 stock.
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.
However, options are not the same thing as stocks because they do not represent ownership in a company. And, although futures use contracts just like options do, options are considered lower risk due to the fact that you can withdraw (or walk away from) an options contract at any point. The price of the option (its premium) is thus a percentage of the underlying asset or security.