Commodity trading: benefits of buying and selling put options

Amongst all the trading securities, investors will find maximum freedom in options trading. The options approach enables an investor to open and close bets at any given moment. It facilitates flexibility in terms of position. It, however, shows great potential for losses, thereby necessitating the importance of investing with risk capital. Ask any risk management specialist and he will tell you why this is a primary preventive measure in options trading. Even if speculating in such trading mediums does not suit your style, it is important to gather knowledge regarding various spheres of investment. Financial derivatives such as this occupy a huge chunk within the trading sector.

As mentioned earlier, options are a highly complex derivative. Even though it provides enough liberty to fix trading positions, it only guarantees extremities in terms of profit and loss. How then would anyone guarantee profits in something that is innately dicey? Experts have suggested certain strategies that may favor the investor profitably. Options selling is an obvious choice to ensure that the money keeps rolling in. Typically, sellers benefit from time decay strategy for the time value bought from the buyers. In other words, an expanded time bracket works in favor of the seller even if the commodity is static. Inverse this situation to consider the put buyer and you will see how the dynamics change. Traders who opt for put buying do so believing that the market for commodities will face a downward trend. This would be their chance to shine and reap as many benefits as possible from the apparent ‘losses’. Coming back to the fundamentals, commodity options expire quickly and the strategy that facilitates profit for put buyers is long term trading. This depends on the longevity of the time value.

There are three relational aspects to a put option: in, out, and at the money. An option is considered ‘in the money’ when the commodity market price is less than the strike price. ‘Out the money’ implies that the current price of the underlying is greater than the strike price. The status indicates equivalence when the option shows a balanced relation between the market price and the strike price. The last status is highly effective, as it shows no intrinsic value and constitutes the highest time value. Investors are sure to amass huge premium benefits under such favorable circumstances. Option derivatives approach their expiration rather quickly, rendering them worthless. This is an excellent opportunity to master the situation. The upper hand facilitated by this status will help you pre-determine your benefits much before the trade begins.

How do you benefit from buying or selling derivatives? Sellers are removed from the position of predicting which way the market swings. Once the option becomes worthless, all your premiums translate into profits. Three aspects make buying put options successful: the right duration for buying the put, the amount invested on that option, and the length of a market move. Options benefits are like a pack of cards, meticulously positioned to achieve the desired structure. At the base are the fundamentals of commodity trading and at its apex is the much sought-after profit. With due assistance from an expert financial advisor, you will be able to determine your bets much more efficiently.

Mike Moran is the author of this article on costa rica.