The Ins & Outs Of Commodity Options
By Christine Birkner
Due to strong demand, rising fuel and input costs and restrictions on world exports, agriculture markets have experienced record volatility in recent months. One way to profit from price volatility while limiting your risk is through the use of options.
There are many advantages to trading options instead of the underlying futures. Controlling risk, particularly in today’s volatile markets , is one of the greatest advantages...
...Mark Longo of The Options Insider.com notes that margin requirements on futures contracts can be expensive, but commodity options let futures traders reduce risk in their portfolios and “allow market participants to trade commodity contracts with smaller initial investments and with much higher leverage...”
...Longo says the protective put strategy can become expensive in the midst of high volatility, so he suggests that traders offset the expense by combining the protective put with a covered call. In this position, known as a collar, “the revenue from the covered call increases your downside protection and also offsets the cost of the protective put,” Longo says, adding that the collar position “is very popular with fund managers and others looking for low-cost ways to reduce their portfolio risk.”