Before it's here, it's on the Bloomberg Terminal. How Do Stock Index Futures Work? The hedger, on the other hand, tries to limit exposure to risk. No purchase of the underlying required or desired. Total margin requirement minus premium collected.
I'm a huge fan of trading commodity options. And you should be, too. But there are some nuances when trading commodity options that you have to consider if you're going to move some capital away from equities. These 3 differences are the most important concepts to understand, as they can potentially change the way you trade these instruments. If there is one thing to learn about options is that each contract will have a different implied volatility.
You can visualize implied volatility over various strikes by looking at the volatility skew. Notice that as we go lower in strike, the implied volatility on each contract rises. This is because option traders are willing to pay up for "tail-risk" protection, and most hedgers in equities are fearful of downside.
Instead of a "skew" we now have a "smile. It comes down to the perception of risk. Equity investors are fearful of downside in equities. But in commodities like gold, oil, soybeans, and currencies the perception of risk is bi-directional. So when hedgers and speculators come out to commodity options, they fear strong moves in either direction. This changes the strategy set used in commodity options trading-- iron condors become more attractive, as do ratio sales after extreme moves.
Single stock equities can be driven by upgrades, downgrades, earnings, FDA events, insider selling, holding updates, institutional rebalancing, intermarket correlation, same store sales This heightened risk produces higher potential reward-- and for those that want to get more conservative, trading indexes or index futures can mitigate that risk.
With commodity options, the risks that drive movement are quite different than what drives equities. It could be based off supply reports or interest rate changes by central banks. Because the risks commodities futures trading vs stock options when company different, it can give you a way to diversify your trades against different risks. This can be crucial when finding the best trades. Joe farmer needs to sell his soybeans. Spacely Sprocket company needs to hedge their Euro risk. ZeroHedge has to buy more silver to combat the manipulators.
They look to buy stock in companies. Contrast that to gold and oil: there's no cash flow from these. From a structural standpoint, they aren't "investments. If we get the first scenario, then correlations will ratchet up among stocks and it will be a macro game again. If the second comes along, then summer volatility and liquidity in equities will dwindle. Either way, commodity options trading is definitly coming back into my trading arsenal for the next few months.
Just Released: Get Your Options trading the hidden reality by charles m cottle Iron Condor Trading Toolkit. Click Here to Download. Fear is In Both Directions If there is one thing to learn about options is that each contract will have a different implied volatility. Below is a picture from LiveVol showing the volatility skew for SPY June Options: Notice that as we go lower in strike, the implied volatility on each contract rises.
Compare that with the volatility skew for GLD June Options: Instead of a "skew" we now have a "smile. That means the tail risk can be on either side. Commodities Have Different Event Based Risk Single stock equities can be driven by upgrades, downgrades, earnings, FDA events, insider selling, holding updates, institutional rebalancing, intermarket correlation, same store sales Commodity Option Traders Are a Different Breed Remember, it comes down to the perception of risk.
Why is risk bi-directional? Because the motivations in the commodities market are completely different than stocks. What's going on right now I see two possibilities heading into the summer months. Steven Place is the founder and head trader at investingwithoptions. See How I Can Help You.
Get updated commodity futures prices. Find information about commodity prices and trading, Company. Careers;. Apr 30, · 5 advantages of commodity vs. equity options. writing stock options and writing options on futures. commodity options. In commodities. Futures Vs. Commodities. Commodity Trading. Commodities exchanges exist to facilitate trades in How to Buy Commodities Stock ; Understanding Futures -Based.