Commodity Options Trader Talk - dummies

By Amine Bouchentouf

Commodity options traders have their own language. Options contracts give you the option to buy futures contracts for commodities such as wheat and zinc. When talking about options, you need to know certain terms:

  • Premium: The price you actually pay for the option. If you don’t exercise your option, the only money you lose is the premium you paid for the contract in the first place.

  • Expiration date: The date at which the option expires. After the expiration date, the contract is no longer valid.

  • Strike price: The predetermined price at which the underlying asset is purchased or sold.

  • At-the-money: When the strike price is equal to the market price, the option is known as being at-the-money.

  • In-the-money: In a call option, when the asset’s market price is above the strike price, it’s in-the-money. In the land of puts, an option is in-the-money when the market price is below the strike price.

  • Out-of-the-money: When the market price is below the strike price in a call option, that option is a money-loser: It’s out-of-the-money. When the market price is greater than the strike price in a put option, it’s out-of-the-money.

  • Open interest: The total number of options or futures contracts that are still open on any given trading session. Open interest is an important measure of market interest.

For example, if you expect the price of the June copper futures contract on the CME to increase, you can buy an option on the CME that gives you the right to purchase the June copper futures contract for a specific price. You pay a premium for this option and, if you don’t exercise your option before the expiration date, the only thing you lose is the premium.