Should You Trade Commodity Options?
The vast majority of my articles focus on trading equities options and equity index options. Of course, those are the most popular options, so it makes sense. However, let’s not forget about commodity options.
First off, when trading commodity options, I recommend only trading options on commodity ETFs. Yes, options do trade on commodity futures. However, the conversions are slightly different and the risk/reward payout can be confusing. Plus, your trading platform may not support futures options.
Meanwhile, there are plenty of commodity ETFs which offer options. They work the same exact way as other equity options. And, the more popular ones are very liquid. (Even the less liquid commodity ETFs typically have reasonable bid/ask spreads.)
Here’s the deal…
The most active commodity options are the ones you’d expect… gold, oil, natural gas, and silver. Many traders speculate on the prices of these ultra-popular commodities, so there’s always plenty of action.
Gold and oil are good ways to bet on overall economic activity. Plus, there are interesting spread scenarios like the gold/silver ratio. Or, you can use natural gas as a way to trade harsh or unusual weather.
Basically, there are a multitude of reasons to trade commodity options. And, they tend to be more straightforward than equity options. For instance, you don’t have to worry how the market will react to a certain earnings report. The supply/demand dynamics of commodities tend to be a lot more logical.
And then you add in the benefits of options…
Commodities themselves tend to be more volatile than stocks. However, using options dramatically reduces your risk – especially when using commodity ETF options.
Finally, commodity ETF options are available on less popular commodities as well. You can just as easily trade copper, corn, cattle, and sugar as you can gold and silver. That gives traders a wide variety of choices.
Bottom line, I may not talk about commodity options often, but there are plenty of good reasons to trade them. Just make sure you stick to commodity ETF options. And don’t forget to use the same principles you’d use for trading equity/index options.
Yours in Profit,
Gordon Lewis
Category: Options Trading
