Commodity choices are options according to commodity. Commodity choice is the right although not a duty to trade an investment in a specific cost. Commodity choices are utilized by farming producers, commodity purchaser, investor, and speculator. All of them has their very own goal for implementing commodity option. Farming producers and commodity purchaser buy choice for hedging. Investor and speculator make use of this choice to make profit.
Farming producers or player uses commodity options to lower their chance of loss due to commodity cost change. A player who grown wheat buy options to allow them to sell their wheat in a specific cost. At that time he grown the wheat it had been $300 per bushel and that he hope the cost stays at $300 per bushel to make profit. If for whatever reason the cost drops to $250 per bushel the player will not make any profit. To lessen his risk the he bought put option so later on he is able to sell at $300 per bushel.
At this point you know available the right to market goods in a certain cost. This right is known as put option. If there’s the right to market, then there’s the right to purchase. The authority to buy is known as call option. Commodity purchaser who would like to safeguard themselves in the wheat cost increase tends to buy call option. There are lots of companies which buy wheat. One of these is flour producer. Flour is made of wheat, to produce flour they have to buy wheat. If flour producers wish to keep buying wheat at $300 per bushel, they’ll buy call option. If wheat increases to $320 they’ll need a larger investment to purchase wheat and will also reduce their profit.
Commodity option is comparable to investment. Additionally, it has premiums, strike cost and expiration date. The idea is comparable with investment. Strike cost may be the cost where the actual commodity can be purchased or offered. Fees are the cost from the right. Expiration date may be the last date that the choice is still valid.
Following the option passes the expiration date and weren’t performed, this means it expire worthlessly. Here’s a good example. The player purchased a put option at strike cost $300 for $50. $50 may be the premium. Once the option expired the wheat cost reaches $305. Therefore the player doesn’t execute his right while he sell it at greater cost than strike cost. The player will gain by selling his wheat at $305 but loss his $50 money in the options premium.