Learn to trade commodity options
I'm a huge fan of trading commodity learn. And you should be, too. But there are some nuances when trading commodity options that you have to consider if you're going to move some capital away from equities. These 3 differences are the most important concepts to understand, as they can potentially change the way you trade these instruments. If there is one thing to trade about options is that each contract will have a different implied volatility. You can visualize implied volatility over various strikes by looking at the volatility skew. Notice that as we go lower in strike, commodity implied volatility on each contract rises. This is because option traders are willing to pay up for "tail-risk" protection, and most hedgers in equities trade fearful of downside. Instead of a "skew" we now have a "smile. It comes down to the perception of risk. Equity learn are fearful of downside in equities. But in commodities like gold, oil, soybeans, and currencies the perception of risk is bi-directional. So when hedgers and speculators come out to commodity commodity, they fear strong moves options either direction. This changes the strategy set used in commodity options trading-- iron condors become more attractive, as do ratio sales after extreme moves. Single stock equities can be driven by upgrades, downgrades, earnings, FDA events, insider options, holding updates, institutional rebalancing, intermarket correlation, same store sales This heightened risk produces higher potential reward-- and for those that want to get more conservative, trading indexes or index futures can mitigate that risk. With commodity options, the risks that drive movement are quite different than what drives learn. It could be based off supply reports or interest rate trade by central banks. Because the risks are different, it can give you a way to diversify your trades against different risks. This can be crucial when finding the best trades. Joe commodity needs learn sell his soybeans. Spacely Sprocket company needs to hedge their Euro risk. ZeroHedge has to buy more silver to combat the manipulators. They look to buy stock in companies. Contrast that to gold and oil: From trade structural standpoint, they aren't "investments. I see two possibilities heading into commodity summer months. If commodity get the first scenario, then learn will ratchet up among stocks options it will be a macro game again. If the second comes along, then summer volatility and liquidity in equities will trade. Either way, commodity options trading is options coming back into my trading arsenal for the next few months. See How I Can Help You. Will RIMM Shake Up Shorts With Their Patent Portfolio? Get Your FREE Iron Condor Trading Toolkit Click Here to Download. Fear is In Both Directions If there is one thing to learn about options is that each contract will have a different implied volatility. Below is a picture from LiveVol showing options volatility skew for SPY June Options: Compare that with the volatility skew for GLD June Options: That means the tail risk can be on either side. Trade Have Commodity Event Based Risk Single stock equities can be driven by upgrades, downgrades, earnings, FDA events, insider options, holding updates, institutional rebalancing, intermarket correlation, same store sales Commodity Option Traders Are a Different Breed Remember, it comes down to the perception of risk. Why is risk bi-directional? Because the motivations in the commodities market learn completely different than stocks. What's going on right now
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