I have been following commodities for about 15 years, more or less, and it is probably one of the most interesting things a person can do. Sometimes it seems so hard to understand why prices move in the way they do, other times it looks so obvious that it seems too easy. Whenever you get that feeling about being too easy you need to tell yourself to slow down and review any trades you have on and maybe take profits and just watch for awhile.
OK we need to get to the topic of options, specifically options for beginning traders. First of all I need to assume that you have some type of knowledge about commodities, futures and a little background about how they are traded. If not that is OK too, just finish reading this article and we can help you find a good place to start learning.
I started out trading futures and did OK, but got too excited when a trade went well, it was the best feeling to make money that quickly. But soon you find out it isn’t always that easy. So I would regroup and study anything I could about futures and soon started to look at trading options. And boy there sure are a lot of ways to trade options. Some strategies would involve the same thing as making 4 to 8 trades to establish a position.
There are terms like Butterfly and others that take longer to learn and cost so much to do that I don’t know why people starting out would get involved with such complicated trading ideas. I think the best way to trade options is to keep is simple. If your study of the direction of a particular commodity says it is going to go up, then buy a call(s) If the opposite is true, then buy a put(s)
Now the only thing besides direction of the market is knowing what option to buy. But before I go any further I should admit to sometimes using a multiple option approach, but it is very simple to do. If an option is a little too expensive but I am sure of the direction of the commodity I will do a option spread.
I do what is called many things by different people or brokerages, I call a debit bull spread(if long) or a debit bear spread(if short). You simply go from the actual futures price for a certain month and buy a call and sell a further out call option for a predetermined price for the 2 options(if bullish) or buy a put and sell a further out put option for a price determined for both(if bearish.)
The risk would be what you paid for the spread and the maximum profit would be the difference between the 2 options that were purchased and sold. Remember this must be done as a spread so you don’t have a margin on the option you sold. If it is the first time you try this type of trade call the brokerage and make the order for the trade with a live person even if you have an online account, you should have them walk you through it at least the first time.
But when you are starting out there is nothing wrong with buying a call or a put and then just follow the market and get used to the daily ups and downs. You will only be responsible for the price you paid for the option so you shouldn’t have to worry yourself sick about it and be able to sleep at night. Just start small and feel the markets and how they move, it really is exciting to watch.
That’s all for now, but I plan on many more articles to come about trading options in the near future, so stay tuned and good luck.
I am not a CTA this information is for education purposes only. Do not make actual trades based on any opinions expressed herein, information is meant for training and not actual trading.