COMMODITY OPTIONS IN THE ACCOUNT STATEMENT

When you buy a commodity option or option spread, the cost plus commission and other charges associated with the transaction are deducted from cash in your account. That is, you pay the full cost upfront. Yet this does not mean that the total value of your trading account will drop by that amount. Let's take a look at the recording of commodity option transactions in greater detail.

Buying Commodity Options

The purchase transaction is recorded in the open position section of the account statement and includes a full description of the option, the purchase price and date and finally, the settlement price of the option as of the date of the account statement. The option is an asset and its value, as determined by the settlement price, is recorded under a separate section called Long Option Value that, in turn, is included in the total or liquidity value of the account statement. Every day, this value may change depending in part upon the price movement of the underlying commodity. While the value of an option can theoretically rise without limit, it cannot fall below zero.

When buying an option, there is a transfer among recording items of the account statement: cash in the account is reduced while Long Option Value is increased. That is why the total value of the account will not drop by the amount of the option purchase. In fact, if the option settles the day equal to the price at which you paid for it, then your total account value will only decrease by the amount of any commission and fees paid, not counting movements in any other open position values.

Buying Commodity Option Spreads

Commodity option spreads are recorded as individual option positions, one long and one short, in the open position section of the account statement. The long option is an asset. The value of this asset is determined by the day's settlement price and recorded under a separate section called Long Option Value. Every day, this value may change.

The short option is a liability. The value of this liability is determined by the day's settlement price and recorded under a separate section called Short Option Value. Every day, this value may change. A short option position typically requires margin, much as a futures contract, but because the position is fully hedged by the long option that constitutes the other leg of the spread, no margin is required.

To calculate the spread value as of the account statement date, you only need subtract the settlement prices of the two component options. This value is bound between its maximum value - calculated as the difference between the two strike prices of the component options - and zero.

Even though cash in the account drops by the net cost of the option spread upon purchase, the total account value that includes the Long Option Value and Short Option Value will not drop by this amount. In fact, because spread values tend to move slowly from day to day, the total account value may not change much after having bought a spread though it will decrease by the amount of any commission and fees paid.