Getting Started in Commodities

Chapter 8

Options Trading in the Commodity Markets

What Is an Option?

In financial circles, an option is referred to as a derivative. A derivative is a financial instrument. Its price fluctuates based on the price movements of another security, hence the use of the word derivative. In other words, the price of the option is derived from the price of the underlying security. For example, the price of a given soybean option is based primarily on the price of the underlying soybean futures contract.

option

a trading instrument that enables the buyer to purchase (call) or sell (put) the underlying market at a specific strike price until a specific expiration date.

There are two types of options: calls and puts. The purchase of a call option—also known as a long call strategy—gives the buyer the right, but not the obligation, to buy a specific futures contract at a specific price until a specific date. Typically, a call option will increase in price as the underlying security rises in price.

call

a bullish type of option contract that gives the buyer the right, but not the obligation, to buy a specific asset at a specific price for a predetermined time.

The purchase of a put option—also known as a long put strategy—gives the buyer the right, but not the obligation, to sell a specific ...