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When you first log in to IG. However, you may customize this dashboard to fit various tabs alongside one another, including the list of markets, multiple trade execution windows, and the position manager. Unlike stocks, an ETF represents a basket of multiple assets, rather than a single asset. ETFs can include stocks; agricultural commodities; precious metals like gold and silver ; base metals like copper ; international market indices; and bonds. ETF options are standard put and call options contracts where traders speculate on the price of a particular market in a given time frame.

Unlike index options, ETF options can also be subject to early exercise where the options holder can carry out the trade at the strike price on the expiration date. While both ETF and mutual funds are assets grouped in one offering, the main difference between the two is the method of management and trading times. Mutual funds are purchased and sold just once daily and are actively managed by experts — this also results in higher costs. ETFs are passively managed and traded throughout the day like stocks. Options trading is a high-risk, high-reward form of trading, so it can be thought of as an advanced type of trading.

That said, once you understand how options work and learn how markets of interest tend to move, options can lead the way into the intermediate trader league. Options carry risks like any other trade forms. Options carry a different type of risk to conventional stock trading. Despite the ability to withdraw from an options agreement, trades must factor in the potential loss of a sizable options fee.

Traders holding long positions on assets can also hedge against losses, where covered calls are placed and the options contracts are used as an income stream. There are many options strategies available to traders, but every trade entails risk. Each trader develops a unique process, informed by market knowledge and technical analysis, which allows for more accurate speculation. Since time frames are especially a key factor in options trading, traders are often considered more active than traders of other, conventional markets.

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Swing traders tend to trade every few days, while day traders may trade every few hours. Options traders tend to track the market at all times for opportunities to buy or sell a contract at a profitable time. A good platform supports the trader in maximizing the chances of a profitable trade. Several brokers offer mobile applications, though AvaTrade stands out with its AvaOptions mobile app. AvaOptions was specifically created with mobile options traders in mind. It is a feature-rich application with advanced trading tools and can be downloaded from the iOS app store, or Google Play store.

We hate spam - see our privacy policy. Skip to content. Above the price of Rs. However, on the downside irrespective of how low the price the price of crude oil goes, the loss for the buyer of the crude oil call options will be limited to Rs. The above call option becomes in-the-money ITM above Rs. Between the levels of Rs. Above Rs. The above is from the point of view of the buyer of the call option.

Futures Options Trading Basics - Commodity Options Trading - Strategies

What happens to the seller of the call option? His cash flows will be the exact reverse of the buyer. For the seller of the call option, the maximum profit will be Rs. Let us now consider a Crude Oil put option of strike Rs. How would the payoff table look like for this put option? As can be seen from the above table, the maximum loss for the buyer of the put option is Rs. Below the price of Rs. However, on the upside irrespective of how high the price of crude oil goes, the loss for the buyer of the crude oil put options will be limited to Rs.

The above put option becomes in-the-money ITM below Rs. Below Rs. The above is from the point of view of the buyer of the put option. What happens to the seller of the put option? For the seller of the put option, the maximum profit will be Rs. Commodity options are priced on the basis of demand and supply in the market.

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But is there an underlying theoretical precept on which these prices are calculated. Let us look at these aspects with the help of a live illustration of a gold commodity option and how the valuation works out. What one needs to broadly remember is that the volatility and the time to expiry impacts the calls and puts in the same direction.

An increase in spot price and interest rates is positive for calls and negative for the puts. On the other hand, an increase in the strike price is negative for calls and positive for puts. The above table also captures the option Greeks which measure of sensitive of option prices to various factors impacting option values. The final settlement is a lot more complicated in case of commodity options since they will devolve into futures. Here is what you need to know about final settlement and devolvement, which will happen 2 days prior to the futures settlement. In other words, why do people trade options on commodity futures rather than options on commodities?

Introduction to Commodity Options

Futures contracts have well established mechanisms for establishing settlement prices. There's no need to duplicate that work again for a option contract. There's also a self fulfilling aspect here - options on futures have higher liquidity, and therefore more people trade them, making them more liquid. I forgot to add that options are inherently forward looking contracts, so it wouldn't make sense to mark to market them vs spot.

We could use the OTC forward rate vs a future, but the liquidity of OTC commodity forwards is much less than commodity futures, the futures price discovery process will be more accurate. By Commodity I assume you mainly refer to energy and base metal and not precious metal. Commodities transactions are both financial and physical whereas for other asset classes it is all financial. This characteristics makes spot trading difficult for energy or base metal. For spot trading, delivery takes place immediately which is rarely in the case of crude oil, natural gas or base metal so intuitively there exists lag due to technical constraints between the trade and delivery.

Commodities Trade: All you need to know about commodity options trading

Therefore, most of the trading in commodities are in the form of futures and forward contracts and this makes the liquidity of these contracts to be high the spot trading for energy and base metal is not common. This results to see options are mainly written on liquid assets forwards and futures instead of spot prices. Options on futures: Whereas securities like stocks or bonds have no physical constraints on storage, many energy commodities have low or no storability gas, but especially power, where hydro storage and battery storage capacities are very limited.

Such commodities being essentially non-storeable, forward curves are more complex, i. A lot of options therefore reference futures contracts. Options on spot: Where most players in commodity markets manage price risk via futures, some prefer spot delivery of commodities, i.

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Typically spot prices are substantially more volatile than term prices. Some therefore resort to options that reference spot prices. For convenience, such options again reference longer periods of time, e.