Commodity option trading has come a long way from the days when hog sellers and buyers met at an open auction and placed bids. Once called hedgers, the people in the transaction actually took possession of the commodity or had a direct business interest.
Computerized Markets that Turned Everything into Commodities
Today commodities in commodity option trading are bought and sold in slick computerized markets where buyers and sellers usually don’t meet. Commodities include just about anything you can think of too including agricultural, minerals, metals, weather, foreign currencies, financial products, energy and food. And hedging has become a strategy where a single trader buys and sells options to minimize risk.
Trading Derivatives
With the advent of the Great Recession, the term “derivative” became a bit of a dirty word after the housing market collapsed. But commodity option trading is actually trading derivative contracts. Derivatives are merely contracts that have an underlying asset, but it is the contract that is originally bought and sold. The contract outlines the agreement for the exchange of the commodity should the contract be exercised.
Derivatives are also called futures. Commodity option trading involves futures contracts that are anticipating a price on the underlying asset by a certain point in the future which is the expiration date. The option is the contract while the price is the rate at which the option can be exercised. When you are doing commodity option trading, an exercised option is replaced with a futures position meaning the option has been exercised into an underlying futures contract.
Filed under General by on Sep 17th, 2011. Comment. 
Though currency option trading and Forex option trading are terms used interchangeably, they are not always the same type of trade. Currency option trading is often used by businesses that are operating internationally as a way to reduce the risks associated with fluctuating currency market rates when buying international goods and services.
Fixing an Exchange Rate
Currency option trading can be used for both hedging and speculating, but it is often used to set the most a fluctuating exchange rate could cost the businesses during a business transaction. For example, a company in Spain sells products to a company located in the United States. The payment in U.S. dollars won’t take place for 30 days. In those 30 days the currency exchange rate for dollars and euros can fluctuate leading to a more expensive product order.
You can buy a currency option that creates a contract for a specific currency exchange at a specific time and by a specific date. If the exchange rate were to change in favor of the buying company in the U.S. the option will be allowed to expire. If the exchange rate changes in a way that hurts the U.S. company then the option is exercised.
Commercial or Private Investors
Though the example use is for commercial purposes, an individual investor can certainly do currency option trading. Currency option trading usually involves a sizable investment up front compared to other types of options trading. And currency markets can change frequently meaning you must be willing to track the market regularly to know how to manage your options.
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Currency options trading create options with the foreign exchange providing the underlying assets. The option contract can be traded on a forward basis. This means the settlement date of the options contract is in the future which is usually 30, 60, 90, 6-months or any period up to a year. The currency options are the right but not the obligation to buy or sell currency at a specific strike price before or on an expiration date.
Vanilla Options
Currency options trading leading to a standard option is called a vanilla currency option. If it were a call option, the option would be exercised if the spot exchange rate on the call currency in the Forex market is higher than the strike price stated in the contract. If it is a put option, the contract would be exercised if the Forex market exchange rate for the underlying put asset or put currency remains below the strike price.
Going Exotic
Exotic options are a different type of option in currency options trading. The exotic options are more complex and have varying conditions. For example, the knock-out option has a barrier exchange rate that is called an out-strike. When the out-strike is exceeded, the option automatically expires.
Other exotic options used in currency options trading include the double-barrier option, the binary option, the one-touch-SPOT, the basket option, compound options and many others.
Many traders enjoy the challenge of currency options trading and one reason is because of the flexibility available in trading strategies.
Filed under General by on Sep 1st, 2011. Comment.