Commodity Options on Futures

Options on futures have become such an integral part of financial services that it can be hard to grasp the idea that they were once almost banished from the trading floors of U.S. commodity futures exchanges.

Since the opening bell sounded on the Commodity Exchange, Inc., gold options ring at 10:00 A.M. on October 4, 1982, under a pilot program of the Commodity Futures Trading Commission (CFTC), commodity options trading took off and never looked back. The innovative trading and hedging strategies devised over the years by users of the options markets have greatly expanded the universe of risk management choices. Options on futures have ultimately been proven so valuable that they accounted for nearly 20% of total volume on the New York Mercantile Exchange during its record trading year of 2002, and were equal to nearly a quarter of futures volume.

Options on futures open the door to a host of versatile, economical trading strategies; by using options alone, or in combination with futures contracts, strategies can be found to cover virtually any risk profile, time horizon, or cost consideration.

Options on futures provide:

• A limit on potential loss to the buyer.
• The ability to hedge cash and futures positions against an adverse price direction without foregoing the benefits of favorable price movements.
• The availability of hedging insurance at many different levels of cost and degrees of protection.
• A means for businesses and investors to act aggressively or conservatively on views about the direction and volatility of prices for energy, precious metals, copper, and aluminum.

Because the underlying instrument of an options contract is a futures contract for a specific commodity, market participants can use options to cover themselves against volatile swings in futures prices, just as futures can be used to protect against volatile moves in the prices of the underlying physical commodities.

The Exchange offers options on all major futures contracts: light, sweet crude oil; Brent crude oil; heating oil; unleaded gasoline; natural gas; coal; gold; silver; platinum; copper; and aluminum.

COMEX opened trading in gold options on Monday, October 4. The Coffee, Sugar, and Cocoa Exchange opened a sugar options contract, and the Chicago Board of Trade launched options on Treasury bond futures, both on the previous Friday, October 1.

Commodity Options on Futures: High Volume Trading

By any measure, commodity options are a success. The Futures Industry Association reported that U.S. options on futures volume totaled more than 213 million contracts in 2002, 25% of overall futures volume of 851 million contracts. The Exchanges slate of options contracts are a deep and valuable financial resource providing even more avenues of risk management choices for market participants. The options have not only helped make the markets even more efficient in their ability to transfer risk, but have helped keep the U.S. financial services industry in a position of leadership worldwide.

More Information on Commodities

Commodity Trading with Options

Edge Financial Group is registered and licensed as an Introducing Broker with the Commodity Futures Trading Commission, the federal regulatory agency of futures and options. We are also a member of the National Futures Association, a self-regulatory agency working with the Commodities Futures Trading Commission. Our frim is fully licensed.

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