Commodity options are those held on goods such as crude oil, silver, gold, and wheat. The give investors the right to buy or sell, but not the obligations. Options are traded very rapidly, something that should only be done in partnership with experienced investors like Steve Buzzi, because there is a lot to lose – and a lot to gain if it is done properly.
Within an options contract, there should be a number of things laid out clearly, including:
- Which commodity is involved in the trade.
- Whether it is on call or put.
- How many units are bought/sold.
- What the expiration date is.
- What the strike price is.
Commodity options are popular because they protect investors against volatility in the market. Other than that, however, they are very much like stocks. In both cases, investors have the right to buy/sell but no obligation to do so. They only have a limited time to decide whether or not to buy/sell, however. This offers some key advantages, including:
- Fairer pricing.
- Implementation strategies.
- Diversification.
- Margin.
On the commodities market, the Standardized Portfolio Analysis of Risk (SPAN) is used. This was developed by the Chicago Mercantile Exchange, and it does not calculate a new position’s margin. Rather, it determines what the effect of any new position is on an entire account. In other words, it recalculates the full portfolio.
Most of the time, commodities are bought and sold in the cash market, also known as the spot market. This is because the value is paid there and then, on the spot. Various over the counter exchanges and markets offer them.
Equity options traders seem to be particularly interested in commodity options as of late. In fact, more and more are abandoning equity altogether. This is because the action seems to be in commodities, a financial market that is constantly on the news. Best of all, according to Stephen R Buzzi, the same strategies can be used.
That said, a lot of risk is involved in trading in commodity options and futures and it is important to be realistic about this. In fact, it may not be an appropriate form of investment for everybody. This is why Buzzi will always work with clients first to determine whether commodities would make a good portfolio diversification, or whether they should focus on other elements instead.
As with all financial constructions, commodities are affected by supply and demand. If there is a lot of it, the price will drop. If it is scarce, the price will increase. How they move, however, has been quite predictable over recent years. One of the reasons for this is because commodities are usually affected by the seasons. As a result, they make a very interesting form of investment for beginners, as they are quite easy to understand. Again, however, Buzzi wants to ensure that people are aware of the considerable risks involved, which is the same in all forms of investing, and therefore seek financial advice first.
