MOVING BEYOND STOCK OPTIONS

You may already be familiar with options basics on individual stocks such as a call option on 100 shares of Apple (NASDAQ AAPL) or a put option on 100 shares of Yahoo! (NASDAQ YHOO).

Yet this is only a small set of the investable options that are available to the retail trader. There are many other markets that are unrelated to stocks and that can therefore provide not only diversification but trading opportunities even when stocks are quiet. These are the commodity or futures markets.

There are a great and diverse number of active futures markets and you can buy options on any of them. For example, there are options on agricultural commodities such as wheat and soybeans, options on precious metals such as gold and silver, options on the "soft" commodities such as cotton, cocoa and orange juice, options on energy futures such as crude oil and gasoline and options on financial futures such as bonds, foreign exchange and stock market indices.

Options on commodities trade on a regulated futures and options exchange. There has been extensive consolidation among futures exchanges within the United States over the last decade leaving essentially only two players: CME Group as the industry leader and ICE Futures U.S.

According to CME Group, over 292 million option contracts were traded in 2009. Open outcry is still the most common method for executing commodity option trades though electronic execution is growing in popularity and some contracts, such as options on the E-mini® S&P 500® futures, can only be executed electronically.

When considering the purchase of a commodity option, it's important to have market data at your fingertips. Delayed prices of commodity call and put options as well as prices and charts of the underlying commodity futures, are made available free of charge on the web site of the relevant exchange. Quick links to these resources and instruction on their practical application for select popular markets can be found under the OPTION TRADES pull-down menu at the top of the page.