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Commodities Trading: Purchasing Options To Gain Profit
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One of the more common strategies to obtaining massive profits when trading commodities is buying options. It is interesting to trade using commodities as they make excellent speculation vehicles, due to the fact that they are subject to supply and demand movements and may rise and fall intermittently.
If you're the type of investor who seeks instant gratification for your financial decisions, then buying options might not be your best bet. This is because options eventually use their value over time. They expire -- and a person who takes a gamble on the expensive ones might only see himself losing so much more when things don't turn out right.
The strategy
To sum it all up in one statement, you should only attempt to buy options for a profit when particular commmodities have been dwindling for a considerable period already or are hovering just around their lowest levels for a number of years.
Once you've found these, you should then purchase out-of-money call options that have at least one more year to go before expiring and then hope that their value eventually shifts higher.
Identifying what these commodities is really not so difficult. Commodities can range from a sack of nuts to a barrel or oil or what-have-you. However, the only commodities that you can use to boost your option buying wins are the ones that are listed on the futures market. Such commodities include the likes of sugar, wheat and coffee and even copper, gold and crude oil and its many permutations. In short, food stuffs we encounter everyday.
When researching which commodities you'd like to bank your options against, check a commodity's history. This can be done by looking at long-term charts (usually over ten years) to be able to get an idea of a product's high and lows over the past decade.
Then, look for call options that have either been at the losing end of a massive corporate sell off or been dwindling at consistent record lows. Options that are considered volatile (or those that are too dependent on market movements) should be scrapped off your list.
With this strategy, expert advice does not really make the cut. To be able to gain profits by purchasing options in commodities, you have to step out of the loop for a bit, because, ironically, ignorance will do you good at this point. Sometimes, the expert advice given by the people in the loop might only hamper you from trading and might even create doom and gloom scenarios that are uncalled for.
As soon as the market moves higher, you then sell around 25% of your stakes to be able to gain some form of profit. You can also do this if the papers are starting to talk about the particular commodity to gambled in. You should only sell off the remaining stake you have when the market turns parabolic.
Perhaps the most important tip of all is to stay calm if nothing is happening. You should never force a trade to happen. In fact, some say that once you have purchased an option under a commodity, you should forget about it altogether and quit the urge to monitor it every single day. If you see that nothing is happening, leave it alone.
Ulimately, when trading options under commodities, play only with what you can afford to lose, just to be on the safe side. This particular strategy we have here is actually more tricky to execute than it looks, so it might take a while before you finally get that big win. Start small and practice.
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