In Commodity Market Trading is primarily divided into two broad category based on time horizon are short term trading and long term trading. Long term trading includes buying of commodity, whereas short term trading for direction momentum moves. Commodity Future & option are main instruments for trading in both side of market (ie up or down), but options provide more flexibility to traders in comparison with futures and have lots of benefits which are mention below.
There are lot of strategies which are used in option as income strategy like cover call strategy in which selling the out of money call of holding share. These option strategies can be adopt for regular income as they provide limited risk and regular return. The yield return can be increase on slow moving or low beta stock where is low upside movement is expected.
Option can be used for reducing the risk and use as hedging tool. Investors can hedge their portfolio by buying put option if market or stock is likely to fall. Buying put option is like a buying insurance, which will payoff in case of fall in price of commodities.
Future buyer have unlimited risk on their holding whereas option buyer risk is limited to the premium paid.
One of the biggest charms of option trading which attracts traders is the leverage. The amount fund required is very less in option buying in comparison with commodity future trading. At same time buying option provide better Risk management because maximum amount of loss is premium paid in buy of option.
While trading in Future Commodity, we expect markets to go higher or lower, but option strategies allows us to trade any market scenario, which means trader can create bullish scenario strategies ie buying call, cover call etc, bearish strategies ie buying put, bear put spread etc and strategies for range bound and volatile market like straddle and strangle etc.
Option trading provides customize way of managing risk. Traders can create strategies according to his view about in market and amount of money he is ready risk on. Like aggressive trader can trade his positive view by buying call option whereas a risk adverse trade can trade his positive view buy creating bull call spread which has less risk in comparison with buying naked call.
Option trading provides traders tailor made unique product, in which he has full freedom to use it for hedging or speculation and create strategies for every market scenarios with keep risk under his belt.