Commodity Option Trading

Commodity option trading is also known as futures options trading. It has to be stressed that commodity options are not the same as trading stock options at a Stock Exchange. It is also not Forex options.

The principles are similar in that the commodity option traded is based on an underlying market. Just like in stock and forex options. Their options also are based on an underlying market. This is what an option basically is.

They are not new markets being traded but an option to buy or sell an underlying market. The commodity option being traded is not the commodity but in fact a contract to buy or sell that commodity at a particular price.

An option gives you the right to buy or sell the commodity at a certain price if you choose to exercise that right. If you exercise the option, you will then be long or short a commodity contract. If you do not choose to exercise that right, then you will not exercise the option and take the commodity contract.

A few commodity markets that you can trade options on are corn, wheat, heating oil, live cattle and many more. Corn options will follow the underlying corn futures market.

Now there are different option months and they will follow different months in the underlying commodity market. December corn options will follow the December corn commodity market for example. March corn options will follow the March corn commodity market.

There might be more option months than there are for the underlying commodity months. For example there are February corn options. There is not a February corn commodity market. In these cases, the option markets follow the next commodity market available.

So February corn options follow the March corn commodity market. March would be the underlying market that February options are based on.