The Business of Commodity Option Trading

2007-12-14 10:25:39

( Financial )



The literal meaning of commodity option trading is a product given a choice to buy and sell. The commodities trader is the one transacting this kind of business. A commodities broker can represent a trader to transact and execute a business proposition in behalf of the commodities trader. This trend gives businessmen a motive to make their products more abundant. With this in mind, they produce and buy more efficient tools, set ready transportation for deliveries and give more efficient distribution of products and improve the storage system they have.

A commodity option trading is a type of contract agreed upon by two commodities traders. One trader gives the other the right to buy and sell an asset at a specified price and time frame. A contract is created and signed between these two parties for each of their own protection and advantage. This contract is called the futures and options contract. Traders have an advantage to execute or transact a business away from the commodities exchange office. The commodities exchange office hires accredited commodities brokers to execute business for a trader with the trader’s permission.

Leverage is important to commodity option trading. It has an intrinsic value and will not go bankrupt. The government tries to regulate the prices of the trading commodities to avoid traders to take advantage of their fluctuating prices. There are many limitations in trading commodities. These limitations are created by the government basically to protect the farmers and consumers from being abused of their rights by glut traders.

Every commodities trader should be familiar with the basic feature of the market. Commodity option trading is cash-based in trading principle. However, the underlying commodity option is not a cash commodity. The futures contract and the product are the underlying commodities. Financial instruments account for the majority of futures options trading. Commodity option trading on agriculture is less important than options on financial instruments.


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