Learn To Trade Futures | Commodities Futures Trading Course

 As a newbie, trading futures and learning what futures trading is all about is hard enough. Learning commodity options trading combined with futures trading makes things tougher and more confusing.

However, if you can grasp futures quickly than it may be benefical for you to learn to trade commmodity options trading for more flexibility and power.

As mentioned, trading commodities on futures can really maximize your earnings when trading futures, you must learn the fundamentals of futures trading before you can really understand how options work.

Assuming you are at that point, let’s go over some of the basics of commodity options trading.

Before I explain any further, let me give you a definition of options:

"Options give you the right, without the obligation to either buy or sell an actual futures contract within a specific time frame."

There are two types of commodity options. There are puts and calls. Depending if you are a buying or selling options, determines which direction you are positioning yourself for profit. For instance, buyers of calls are positioning themselves for a move higher within a certain time frame.

Sellers of calls (sometimes called writers) are hoping that the call does not move "in the money" or beyond their strike price as they can be on the hook for unlimited losses if not done correctly.

So let’s back up for a minute and talk about what are strike prices?

Strike prices are prices that are set by exchanges where commodity option buyers and sellers can trade their options. There are "out of the money" options which means that these options are outside of the current price of the underlying futures contract.

There are also options that are called "in the money" because these strike prices are within the current price strike based on the actual futures market.

For an example, let’s assume that we are watching May Corn 09. Let’s also assume that May Corn 09 closed today at 2.50 even. Let’s say I’m pricing calls to buy in an anticipation for a move higher, I might looked at call options strikes at 2.55,2.60, 2.65 and so on.

The 2.55 strike will be more expensive than the 2.65 call options because the 2.55 is closer to the underlying futures market.  This strike has a better chance of going "in the money" hence the price costs more than both the 2.60 and the 2.65.

Having said that, May options don’t expire for another month, so it may better to buy the 2.60 strike as it would be cheaper than the 2.55 call, but would have more chances than going into the money than the 2.65 call.

If I were looking to buy puts, it would be just the opposite. I’ll create more content on options on futures here in the next several posts.

Related posts:

1. Selecting The Right Commodity Options Broker We’ve already talk about selecting a futures trading broker,...