Commodity Option Trading

Commodity Option Trading can be categorized into two types of Commodity Option Trading System. Commodity Option Trading System offers two types of Options,which are Call Option and Put Option.Commodity Option Trading refers to a commodity trading system, in which there is existence of such a market, where the producers get the option of buying or selling a commodity at a specific price level.
For better understanding, it can be stated that the situation of commodity option trading is similar to one, where a farmer gets the opportunity of buying the right from any insurance company to sell his agricultural produce at a specific price level, in case the market prices move below the specific price level.
Types of Commodity Option Trading System
In fact, in case of Commodity Option Trading, there operates a market, where sellers can purchase the right of selling their commodities at a specific price, if the market prices are below the specified price level.

Similarly, there operates a market, where the buyers can purchase the right of buying commodities at a specific price level, if the market prices move to a higher level. On the basis of these two types of markets, we can separately identify two Commodity Option Trading Systems.
Using the first type of Commodity Option Trading System, producers can insure their commodities and can protect the commodities against being sold at a low market price. Utilizing the second type of Commodity Option Trading System, buyers can protect themselves from purchasing the products at high market price.
The Concept of Commodity Option Trading
The sellers who involve in Commodity Option Trading, get the option of insuring and protecting their commodities against market price reduction, but they are not bound by any obligation for exercising the earlier made agreement. So, it can be said that, this system of commodity trading is truly called Commodity Option Trading System.
Types of Option
Call Option- This Option provides the right to buy the underlying commodity at a specified price from the Option Writer on or before the date of expiry of the Option.
Put Option- This Option provides the right to sell the underlying commodity at a specific price level to the Option Writer, on or before the date of expiry of the Option.

 

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Last Updated on : 27th June 2013