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Investing in Commodities, Tip 23: Remember That You Also Have Options


The inherent difference between commodity futures and options is surprisingly simple.

Options contracts on commodity futures may sound like an intimidating proposition, however, these financial instruments offer unparalleled versatility to those who can harness their power. The inherent difference between commodity futures and options is surprisingly simple: Options can be defined as contracts that allow the buyer the right, but not the obligation, to buy or sell a given commodity at a specified price within a specified date range. Likewise, futures are different animals by nature because they obligate both parties to uphold their contract terms upon expiration.

By utilizing options, financial advisors can help protect their client's position from adverse volatility in the market. Savvy investors can execute options trading strategies that are designed to generate consistently positive returns in virtually any market environment, similar to some of the more complex equity options strategies. Furthermore, perhaps the most appealing aspect of using options on futures is the fact that investors can potentially realize hefty profits while limiting their downside risk to the amount paid up front for the option.

Bottom Line: Options on futures contracts can offer lucrative opportunities.

This article is part of the series "Tips for Investing in Commodities." See also:

Tip 1: Futures Do Not Equal Spot

Tip 2: Commodities and Dividends Can Align

Tip 3: Watch Your Tax Rates

Tip 4: China Can Make or Break You

Tip 5: Low Inventories Can Lead to Backwardation

Tip 6: Diversification Is Not a Given

Tip 7: Rolling Front Month Futures Is a Recipe for Disaster

Tip 8: More Than Just Energy and Gold

Tip 9: Watch Out for That K-1!

Tip 10: Consider Expenses Always

Tip 11: Commodity Exposure Through Stocks: Pros & Cons

Tip 12: Know What You're Getting Into

Tip 13: Consider Physical Exposure

Tip 14: Commodity ETFs: Structure Matters

Tip 15: Bigger Does Not Mean Better

Tip 16: Commodity ETFs Get a Bad Rap

Tip 17: Beware the Dollar's Impact

Tip 18: Not All Commodities Are Created Equal

Tip 19: Know Your Geography

Tip 20: Be Mindful of Your Timing

Tip 21: Platinum & Palladium Are the Other Precious Metals

Tip 22: Consider the COT Report

Tip 24: NAGS Vs. UNG -- Different Tools for Different Objectives

Tip 25: Free Resources Can Make Your Life Easier

Follow us on Twitter @CommodityHQ!

Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
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