New Century International

Option trading is a written agreement in the form of a contract (legal agreement) between two parties. The agreement details the selling and purchasing of an asset at a set price at a set date and time in the future. When the economy is bad, commodity option trading often sees an increase because less cash is needed initially and the risk of loss is reduced because options traders can choose not exercise the option. An abundant of information on options trading is available on the web so that when a potential investor gets started in commodity options trading, they can learn what is involved, including the high risks.

One of the first things a trader will want to decide is which commodity or commodities to invest in. There are different types of commodities and then a variety of commodities within each choice. The types of commodities:

• Grains
• Meat
• Softs
• Financials
• Energies

Each has a different amount of risk involved and some are more volatile than others. Different events will affect different commodities. Weather can have a big affect on grains (wheat, corn, rice, etc), while accidents and wars can affect energies (crude oil, petroleum, natural gas, etc.). Choosing options reduces risks involved.

It is called an option because the buyer has the choice to carry out the transaction or not. Sometimes over the life of a contract, the asset value decreases. When this happens the options trader (the buyer) can simply choose not buy or sell the asset. There are two types of option contracts

1. Call option contract-gives the buyer the right to buy the underlying asset
2. Put option contract-gives the buyer the right to sell the underlying asset

There are two types of commodity option traders and they have very different goals. One type is the risk seeker and other type is the risk avoider.

RISK SEEKER

The risk seeker is also known as a speculator. This type of trader is working towards acquiring a profit from a prediction in market direction. Each speculator will have his or her method of analyzing the market. He or she will then use the options market to make a bet on his or her analysis with the goal of making money. It is a gamble at times, but the risks can be reduced and managed with education and experience.

RISK AVOIDER

A risk avoider is also known as a hedger. The risk avoider is in the market because he or she is trying to transfer risk to the speculator. A hedger will use the option market to protect his or her physical position against a negative market movement.

Knowing the amount of money you can comfortably loose, doing research before purchasing options, and managing risk can make commodity options trading a good investment. Over time the profit can outweigh the loss and provide income for an options trader.

Learn more about commodity trading and finding out more about he advantages of being a New Century International client.