The online commodity market has now become one of the fundamental foundations of the trade system of the world. An in-depth knowledge, as well as expertise in how to correctly trade commodities, is very important for the serious trader so that they can earn great profits by simply understanding the actual mechanisms of how to trade on any commodities and solving trading issues. Although commodity trading option in online commodities is quite a simple process, you can only pursue such trading activity only after practising lots of homework together with immense hard work.
What is a commodity option?
Commodity option is an agreement allowing the option purchaser the right, without commitment, to buy or sell a fundamental asset in the grade of a commodity, like valuable metals, oil, or agricultural products, at a chosen price until a selected date.
Different kinds of Commodity Options Contracts
Dependent on the right of the owner, Options contracts are separated into Put option and Call option.
Call Options gives the purchaser the right, but not the commitment, to purchase the fundamental at the declared strike price in a particular time period. On the other hand, the vendor of a call option is obliged to convey a long position in the fundamental futures contract from the strike price in case the purchaser decides to implement the option. Basically, this entails that the vendor would be required to take a short position in the market upon termination.
Put Options provide the purchaser with the right, but not the commitment, to sell the fundamental at the declared strike price in a particular time period. The vendor of a put option is compelled to convey a short position from the strike price if the buyer opts to implement the option. Remember that delivering a short futures contract merely entails being long from the strike price.
Depending on the date when the purchaser can implement his option, Option contracts are assorted into European as well as American Style.
Under an American Style option contract, the purchaser can apply his option at any time from the date of purchase to the date of expiry of the option contract. They have a high premium and provide greater flexibility.
Under a European Style option contract the purchaser of the option can implement his option merely on the date of expiry of the contract.
Why trade commodity options?
You will be able to find a limitless number of commodity options trading schemes accessible in the futures markets. The technique that you opt should be dependent on your qualities, risk capital as well as risk aversion. In simple terms, if you are not an aggressive person and do not have a high acceptance of pain, you perhaps should not be using a commodity futures and options trading scheme that demands high risks. If you do so then it will time and again result in the fear of liquidation of trades which is mistimed and other unsafe emotional decisions.
Commodity options trading offer a flexible as well as efficient way to trade in the futures markets. Additionally, options on futures provide investors with the capability to take advantage of leverage even as giving them the capacity to handle risk. For instance, via the combo of long and short call as well as put options in the commodity markets, a capitalist can plan a trading scheme that conforms to their demands and anticipations. Such a system is the option spread. Remember that the potential is never-ending and will eventually be influenced by a trader's aims, time horizon, market reaction, and risk forbearance.
Online Commodity trading in India has been merely about futures trading for the past 15 years. With the beginning of commodity options trading, the commodity markets obtain an extra product for dealing with risk. But, at any rate, a start is made and that is acceptable.
A trading option is nothing but a contract that provides you with the right to sell or purchase an asset at a definite price at any time just before a specific date, but you are not at all appreciated to do so. Commodity trading options can be of two types, such as call and put. A call option gives you the right to purchase an asset at a fixed rate before a certain date. You can only opt for such option if you think that the actual value of your asset may rise before that given date and then you decide to buy so that you can get it at a much cheap price. In contrast, the put option is just opposite, i.e., under this option, you are basically buying the right to wholesale an asset only if you think that the price of that asset is going to fall before a certain date. These two are the elementary process involved in trading options of online commodities, which are although very complicated or risky but still in practice.
Commodities that can be traded online
Generally, commodities also play a very significant role in the form of safe-haven assets. Today, the huge number of brokers offer their customers with the right commodity trading options of different online commodities as the most genuinely traded products all across the world mainly due to the current industrialization of different commodity-dependent countries. Some of the commodities that every broker will definitely allow you to opt for trading options include agricultural products, livestock, energy, precious metals, etc., as each of these commodities possesses the highest trading volume.
Today, with the advent of online commodity trading options it has become possible to access the global markets easily and even by private traders with their minimum amount of capital only by the aid of online brokers. Therefore, if you want to opt for online trading commodities, there are a few vital factors that you need to follow in an exact manner.
Different books by good authors or latest magazines actually help you to better understand different trading options, especially to those who already have a commodity options-trading account. Even, various brokerage firms also distribute booklets sometimes from which you can educate yourself more about the different terminology of commodity trading options, the varieties of options available to do trading of online commodities, tax considerations for options traders, settling or exercising options, and the risks involved in options trading of online commodities.
To pursue better trading, you need to know that trading options are contracts that provide you with the ultimate right to sell or buy a commodity an underlying security of an asset at a certain price before a definite time period. Just like a bond or stock, an option is a security, which can even be exchanged or traded in different foreign countries and thus can also be sold to any foreign broker. As an option allows you to leverage your own cash by keeping control over a huge value of the stock, however, it can be highly risky because it may expire eventually.
There are two basic major types of commodity trading options of online commodities like puts and calls. Both of these give you the right to either sell or purchase a security at a definite price within a certain timeframe. While trading with online commodities, you are allowed to open a position with the two trading option of call or put for buying or selling a security. Moreover, you can also close it by withdrawing the right of contrary action, exercise on it, or even let it expire.
Options present in trading of online commodities can be easily purchased theoretically or as a protection against losses. Such type of hypothetical purchases allows a trader to gain a huge amount of profit only if he/she can correctly guess the timing, magnitude, or direction of the price movement of the underlying security or assets. On the contrary, this can also turn huge losses or high trade commissions. All these have made trading options a bit risky, especially for newly involved traders. However, trading options can also be utilized as a well-known strategy for protecting your entire investments.
Your first job in trading online commodities is to choose a good and efficient commodity trading broker. Most of the commodity brokers generally offer online trading, but there are some commodity brokers who are actually expertise in online trading. Furthermore, different versatile trading platforms also provide great help to new traders when it comes to analyzing quotes, charts, strategy, or any sorts of order entry. Sometimes apart from guiding you with commodity trading options in online commodities, many online brokers also thus offer a good service, an excellent product, and much low commission rates.
If you have decided to opt for trading options in online commodities, you will surely need to open an efficient brokerage account for entering all your transactions, which can be either online with different websites or even simply a customary account together with your broker. While opening such account just be sure that you clearly understand every detail that is required during the opening a brokerage account. You should also be aware of various fake trading websites or platforms. Therefore, you should always research beforehand about a platform thoroughly in advance without depositing any money. If you want to trade online just make sure that your online brokerage accounts deal with safe modes of payment, such as through a secured payment gateway or using a third-party payment.
Trading options are characteristically the short-term investments so that you can easily find price movements of the asset security to buy or sell in the upcoming future in order to fetch you a healthy return. To precisely predict the price movements, you actually need to understand the fundamentals of technical analysis and commodity trading charts. For this, you need to update yourself regarding support, moving averages, and resistance levels. Even, you need to understand the significance of volume and chart patterns.
Before you can opt for buying or selling options, you will need to opt for the approval from your brokerage firm. Such brokerage firms can easily handle the limits of account sets based upon the experience as well as the money involved in an account, and even every firm has its own prerequisite aimed to provide the detailed account to the customer regarding what he is actually doing. You can also submit a written covered call to avoid an options account. In short, brokerage firms want to ensure customers to clearly understand the risks before opting for any trading options in online commodities.
Avoid paying market prices for options because the execution price may be higher than expected. Instead, name your price with limit orders and maximize your return.
If you really want to avoid the desire to risk your earned profit on a trading technique that you have just learned, then you need to opt for the practice of paper trading. You simply need to enter your entire trading process in a spreadsheet or make it totally computerized by using the trading software. All this will surely help you to evaluate your profits for at least two or three months regularly. If you are making a decent profit, you slowly need your commodity trading options towards real trading. In short, paper trading is not at all similar to the real trading but a nice way to learn mechanics without predicting the actual results.
You always need to be highly determined to do anything simply to improve your profit or return. Just learn from your previous mistakes by fruitfully repeating your successful trading strategies. Traders usually focus on some factors by keeping your strategy focused always rather than on diversifying. You should have over 10 percent of your investment portfolio in commodity trading options of online commodities.
Once you are on the right track to accomplishing some successful trading of online commodities, you will get the approval for more complex trading options with different complicated strategies. However, for this, you need to start by using paper trading with actual trading options as well. This will definitely permit you to carry out the real trading options more easily. One such example of strategy is the straddle one, which includes trading options for both sides of the global market. This strategy is quite effective, especially during the movement of the market up and down, rather than towards a single direction.
If you are experimenting with any advanced techniques for commodity trading options in online commodities, then you will surely find the valued source of information as well as support or help from an online forum of traders similar to you. Just look for a forum online so that you can learn some essential tips from the success and failure story of other traders globally.
Once you have done mastered in simple commodity trading options of online commodities and thus have decided to extend your ability towards more complex trading options, then you will surely need to educate yourself about the so-called foreign language known as Greeks. These Greek symbols are metrics that help traders to enhance their returns through various options. For instances, Delta represents the amount of price that shifts relatively with the price movement of the underlying security asset. Theta symbolizes the most common, time decay for the optional price by measuring how much the price falls as the trading option gets closer to expire. Gamma is the rate at which the Delta value changes based on the stock price.
For beginners, it is always a new venture and for new trades, you should do a huge amount of homework and should also clearly understand the pros and cons of the trading markets where you actually want to trade. After opting for a perfect online commodity broker, next, you need to achieve an approval for commodity trading options in online commodities, and finally, you have to fund the account. The amount of funding or the size of an account completely depends on you once you have opened an account started online commodity trading. Even, your capability of risk tolerance as well as comfort level is also quite essential factors to be considered before funding an account. Before you start with commodities trading options with your real money, it is important to research thoroughly to make a fruitful trading plan. Moreover, proper training, as well as different instances, will also help you to familiarize with different placing orders so that you can beware of making any critical error in order entry.
Last but not the least, before you commence trading commodities online, you need to always keep in mind that you should select your trading options wisely by avoiding any kind of overtrading. If you find that you need to place several trading options, then you are likely walking in the way of overtrading, which may result in a huge loss. Thus, this is one of the greatest cause of downfalls for many online commodity market traders for doing too much trading without being little selective.