ADVANCED OPTIONS TRADING STRATEGIES

The options trading strategies described in this web site - buying commodity call and put options and options spreads - were chosen because they are the most appealing and approachable strategies for the beginner to the commodity markets or indeed for anyone who desires to limit risk and exposure. Yet options are so versatile that a wide range of extended strategies are possible. Here are just a few:

Options with Futures

The purchase or sale of a commodity option can be combined with a purchase or sale of the underlying commodity futures to create synthetic positions. For example, buying a commodity futures and an at-the-money put option on that futures creates a position similar to buying an at-the-money call option on that futures. Synthetic positions are beyond the scope of this site but, if interested, you can find information in our free Options Power Pack. There is one options-with-futures strategy that is becoming common among traders and that is the covered write. This strategy is constructed by selling a call option and buying the underlying interest. For more information, see our free video, Covered-Call Writing for Income Generation.

Selling Options Naked

It is possible to sell a commodity option without having first bought the option or, more generally, without owning any other option or commodity futures that can act as a hedge against the option sale. This is referred to as selling options outright or naked. Selling options outright, whether calls or puts, is riskier than buying options since the downside risk or potential loss is unlimited - similar to that of an outright futures position. For this reason, option sellers must deposit margin just like for a futures transaction, and may be required to deposit additional margin if prices move adversely. It is recommended that beginning traders avoid selling options outright.

Ratio Spreads

Bull call and bear put spreads are balanced meaning that for every option that is bought, one is sold. Yet option spreads can be created that are not balanced as such. For example, you can construct an option spread by buying two call options and selling only one call option. The strike prices of all three can be varied to create complex option strategies to better fit a particular price expectation. Ratio spreads are beyond the scope of this site but, if interested, you can find information in our free Options Power Pack.

Buying In-The-Money Options

The strategies in this site involve buying options that have a strike price close to or above in the case of call options and below in the case of put options the market price of the underlying commodity. These options are referred to as being at-the-money or, in the case of more distant strike prices, out-of-the-money options. A call option can be purchased that has a strike price below the current market price of the underlying commodity and a put option can be purchased that has a strike price above the current market price of the underlying commodity. These options are referred to as being in-the-money as they already have intrinsic value. The disadvantage to buying in-the-money options is their cost: they are expensive and quite often too expensive for most beginners.