5 Surprising Advantages of Selling Commodities Options Over Stock Options

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In finance, a single-stock future SSF is a type of futures contract between two parties to exchange a specified number of stocks in a company for a price agreed today the futures price or the strike price with delivery occurring at a specified future date, the delivery date.

The contracts are traded on a futures exchange. The party agreeing to take delivery of the underlying stock in the future, the "buyer" of the contract, is said to commodities futures trading vs stock options "long", and the party agreeing to deliver the stock in the future, the "seller" of the contract, is said to be "short".

Commodities futures trading vs stock options terminology reflects the expectations of the parties - the buyer hopes or expects that the stock price is going to increase, while the seller hopes or expects that it will decrease.

When purchased, no transmission of share rights or dividends occurs. Being futures contracts they are traded on margin, thus offering leverage, and they are not subject to the short selling limitations that stocks are subjected to. They are traded in various financial markets, including those of the United States, United Kingdom, Spain, India and others. South Africa currently hosts the largest single-stock futures market in the world, trading on averagecontracts daily. In the United States, they were disallowed commodities futures trading vs stock options any exchange listing in the s because the Commodity Futures Trading Commission and the U.

Securities and Exchange Commission were unable to decide which would have the regulatory authority over these products. After commodities futures trading vs stock options Commodity Futures Modernization Act of became law, the two agencies eventually agreed on a jurisdiction-sharing plan and SSF's began trading on November 8, Two new exchanges initially offered security futures products, including single-stock futures, although one of these exchanges has since closed.

Inthe brokerage firm Interactive Brokers made an equity investment in OneChicago and is now a part-owner of the exchange.

Single stock futures values are priced by the market in accordance with the standard theoretical pricing model for forward and futures contracts, which is:. Note the value of r will be slightly different in the two equations. The value of a futures contract is zero at the moment it is established, but changes thereafter until time T, at which point its value equals S T - F ti.

From Wikipedia, the free encyclopedia. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Views Read Edit View history. This page was last edited on 29 Juneat By using this site, you agree to the Terms of Use and Privacy Policy.

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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 are 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: From a structural standpoint, they aren't "investments. I see two possibilities heading into the summer months. 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.

I've put together an Iron Condor Trading Toolkit that gives you the case studies and training needed to be consistently profitable in the market. Click Here to Get the Toolkit. Fear is In Both Directions If there is one thing to learn about options is that each contract will have a different implied volatility.

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 Why is risk bi-directional?

Because the motivations in the commodities market are completely different than stocks. What's going on right now