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 accounting of option transactions in the options statement in greater detail.
Buying Commodity Options
The purchase transaction is recorded in the open position section of the
options statement and includes a full description of the option,
the purchase price and date and finally, the option settlement price as of the date of the account statement. The option is an asset
and its value, as determined by the option 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
options 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 option 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.
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