ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Commodity Options Trading: Things to Think About

Updated on April 6, 2010

Commodity Options Trading

It may be surprising for some that have only a small amount of knowledge about commodity options trading that volatility is the main engine that drives option activity. Everything about options is based on what people are thinking that the option will do, not always what it is currently doing. In a sense, to trade options is to trade volatility, when it comes down to it. You are trading based on the overall expectation of the people that are “in the know” about option premiums, and adjust those premiums accordingly. Always keep in mind that there is no such thing as a stable option. Also, the futures contract price movements will determine the options price movements.

If there is a whole lot of activity going on with the futures contract, and lots of trading volume and erratic prices, you can be sure that the writers of those options are inflating the premiums so that they can compensate for any possible losses they may incur if the “defecation hits the fan”, so to speak. If you simplify the whole idea, volatility is basically the amount of uncertainty that’s in the market at a given time. Since nobody knows exactly what the futures price will do, the option premiums will spike up or drop down wildly, depending on futures contract price movements.

Image Credit: Microsoft Office Clip Art
Image Credit: Microsoft Office Clip Art

Trading Commodity Options

You can put volatility on your side if you know what you’re doing. Volatility can become an ally with the right education. Due to the nature of options, you cannot just buy an option and sit there and not attend to the trade. You must be actively involved in the option trading process because all options are short-term, even LEAPS in the stock market are relatively short term. Therefore, you must be ready to react when the market hands you something on a platter, to use a metaphor. It will take much practice to master this immediate style of trading, but it will be well worth it as your account gets fatter from your profits.

There are two kinds of volatility that are immediately recognized by serious option traders everywhere: Implied volatility and historical volatility. Historical volatility is just that—what the futures contract (or stock) has done historically as far as price movement goes. Every market has regular high and low points, and the transition between these points is basically what volatility is all about. Implied volatility is basically a guess of what the market may do based on what it has done…almost like the way the meteorologist predicts future weather based on past weather patterns. Once you understand implied volatility, it will help you to guess what you should do, and whether to buy or sell (write) options. A good rule of thumb to use is this: If you believe the volatility will increase, buy options. If you believe the volatility will decrease, sell or write options.

Well, that is all for now. I hope you have been further educated in commodity options trading volatility.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)