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Should You Use Commodity Options?

BY: Samuel Winters | Category: Finance | Submitted: 2011-03-28 04:03:31
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Article Summary: "Reasons to trade commodity options and reasons not to trade them. Most private investors don't have time to follow the markets very closely. Most of us have jobs. Some have kids. There are other things to do..."

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Should you use options?

Should you. Or should you not. That's what this article looks at.

Most private investors don't have time to follow the markets very closely. Most of us have jobs. Some have kids. There are other things to do. Not enough time to follow the markets closely. Is this true for you? Maybe you should buy an option. You buy a put option. Then you can only lose the money you paid for the option. If you buy a call, the same thing is true. The capital you risk is limited. But this is only for one type of position. Long positions. It's not true for short positions. For long positions the complete opposite is true. Long positions should be monitored closely. Or put in stop losses with your broker. You have to tell the broker to close the position at a certain price. A proper stop-loss. If you write an option the possible loss is very big. If you write a call option Theoretically infinite. So if you don't follow the markets minute to minute. Never write options.

Another reason to use options. Is if you only want some changes in the market. You don't want every little change. But if the price moves a lot. You want to be in on that.

Example: You are a silversmith. You are good at your work. You make money. You buy a lot of silver and turn it into jewelry. People buy your jewelry. You make a profit. If the silver price get's very high. You will not make a profit. So you want insurance. In case the price of the silver commodity get's very high. But under "normal" circumstances you are ok. Then you don't need insurance. You only need insurance against very high prices. You could buy a call option. At $37/oz you are ok. At $42/oz silver you don't make a profit. Buy a $42/oz call option. On this option you will make money if the silver price goes above $42. You lose money from your shop but you make money from the option. So it's insurance. Not speculation. Only to protect you from high prices of silver. Not to make money from speculating in the markets. So you don't have to worry about the silver price. Only work with your craft. And talk to customers. The things you are good at.

• You should buy if you need insurance.
• You should buy if you want to speculate.
• Only write/sell if you watch the markets minute to minute.
• Never write options if you are not 100% sure of what you are doing.

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