Long Commodity Call or Put Trade

An option is an asset and can be sold on any business day prior to its expiration. You will sell the option if there is no anticipated gain in continuing to hold it. For example, it may be that the option has increased in value but that the price of the underlying commodity is now expected to languish or even retrace. In this case, it would be better to realize the option's current value by selling the option rather than surrender gain to diminishing time value. Or it may be that the anticipated price movement in the underlying commodity has not occurred and, because of information that has become available, is now unlikely to occur. While the maximum loss of an option purchase is limited to the premium paid plus brokerage commission and other trading fees, so long as the option still has value some of the initial cost can be recouped by selling the option.

The net profit or loss on the option trade is simply the selling price less the purchase price less brokerage commission and other trading fees. Once sold, the option position is closed and there is no further market exposure.

An option that has intrinsic value at expiration will be automatically exercised into a corresponding position in the underlying commodity futures: long the futures if a call option and short the futures if a put option. If this is not desired, then any option held that has intrinsic value must be sold prior to its expiration. It may be difficult to sell an option on expiration day. In this case, the holder of an in-the-money option can let the option be automatically exercised and square the anticipated futures position during the day. You then need to check prices as the trading day ends to make sure that your option will finish in-the-money. If so, you need not take any further action. If not, you'll have to close the futures trade that you earlier established but, as shown in Playing the Expiration at right, this will provide an opportunity for extra gain.

Of course, should you desire to carry the futures position, then you can let the option be exercised and not square the resulting position. You may do this if you expect that prices will continue to move your way. Carrying the futures position entails more risk than the option and requires a margin deposit whose value depends upon the particular commodity market.

An option that has zero value at expiration will be cancelled and automatically removed from the account statement. You, as the holder, need not sell the option prior to expiration or take any action.

Long Commodity Option Spread Trade

An option spread is an asset and can be sold on any business day prior to its expiration if there is no anticipated gain in continuing to hold it. When selling the option spread, both legs must be executed simultaneously.

In general, it is more difficult to sell and thereby close an option spread than an individual option especially if the market moves away from the strike prices. Consequently, it will often be better, if not necessary, to hold an option spread to expiration, especially if it has little market value.

An option spread that expires in-the-money is automatically closed and removed from the account leaving the maximum value in cash. An option spread that has zero value at expiration is simply removed from the account statement. In both cases, as the buyer or holder of the spread, you need not do anything.

If the price of the underlying commodity is between the two strike prices of an option spread at expiration, then the option sold, whether a call or put, will expire worthless while the option purchased will be in-the-money. A bull call spread will essentially degenerate into a long call option and a bear put spread will essentially degenerate into a long put option. In either case, this position can be managed as described above. For markets that are volatile and that can move the range between the two strike prices of the option spread within the trading day, it is best to wait until just before expiration of the options to confirm that the futures will settle between the two strike prices.