What is a commodity option?

The possibility of commodity is a contract in which a person known as an option writer sells the investor the right to buy or sell a commodity for a guaranteed price for a fixed time. Possibilities are traded on a wide range of commodities, including grains, meat and currencies. Oil, metals and financial tools are also common commodities for investment in commodities.

Some people confuse commodity futures and commodity options. In fact, there are two main differences. The possibility of commodity creates the right to buy a commodity. On the other hand, the commodity futures contract creates a legal obligation to buy a commodity. Another important difference is that the futures contract must be appreciated by a specific date. The possibility can be applied at any point over a limited period of time.

There are four basic elements for commodity option. The first property is the basic commodity. This is the type of commodity that the possibility provides the investor the right to buy or sell. Thdiry element that is decisive for creating the possibility of commodities,is the price of a strike or exercise. This is a guaranteed price at which the investor can use the possibility to buy or sell commodity.

The third characteristic of the commodity option is the expiration date. This is the last possible date that the buyer has the right to exercise his right to buy or sell the possibility of commodities. The investor cannot buy or sell a basic commodity for a promised price after this date. The last element of the possibility of commodities is premium. Premium represents the price that the investor pays for the purchase of the possibility. On the contrary, the writer of the option receives a bonus for the risk of writing the possibility.

In principle, there are two types of commodity options: calls and cladding. The investor buys the possibility of calling because he expects the price of the basic commodity to a certain amount in a limited period of time. The buyer who predicts movement in the price of the commodity usually buys an option. VOLETE PUT Give the Buyer the right to sell a certain commodityfor a specific price over a limited period of time. Many investors buy calls and combine options together as part of an investment strategy such as spreading.

The investor who buys the possibility will do so because he feels that the price of the basic commodity will take a significant step in a certain direction over a specified period of time. Investors usually buy options because they are cheaper than a real commodity. The possibilities allow not only investors to reduce costs, but also reduce the level of risk. Investors who are right about the direction of movement of prices and the size of movement can benefit from their investment considerable profit.

On the other hand, the writer of the option believes that the price of the basic commodity will be very moving. Or will be the movement of prices in the opposite direction. The writer of options, which is wrong in volatile volatility of prices, may suffer from a huge loss. However, some loss may be compensated with the money that the seller receives for the sellers for risking to write commodity options.