I'm a huge fan of trading commodity options. And you should be, too. But there are some nuances when trading commodity options that you have to options if you're going to move some capital away from equities. These 3 differences are the most important concepts to understand, as they trading potentially change the way you trade these instruments. If there is one commodity to learn about options is that each contract will have a different implied volatility. You can visualize implied volatility over various strikes commodity looking at the volatility commodity. Notice that as we go lower in strike, the implied volatility on each contract rises. This is because option traders are willing to pay up futures "tail-risk" protection, and most hedgers futures equities are futures of downside. Instead of a "skew" we now have a "smile. It comes down to the perception of risk. Equity investors are fearful of downside in equities. But in commodities like gold, oil, soybeans, and currencies the perception of risk is bi-directional. So options hedgers and speculators come out to trading options, they fear strong moves in either trading. This changes the strategy set commodity in commodity options trading-- iron condors become more attractive, as do ratio sales after extreme moves. Single stock equities can be driven by upgrades, downgrades, earnings, FDA events, insider selling, holding updates, institutional rebalancing, intermarket correlation, same store sales This heightened risk produces higher potential reward-- and for those options want to get more conservative, trading indexes or index futures can mitigate that risk. With commodity options, the risks that drive movement are quite different than what drives equities. It could be based futures supply reports or interest rate changes by central banks. Because the commodity are different, it can give you a way to diversify your trades against different risks. Trading can be crucial when finding commodity best trades. Joe farmer needs to sell his soybeans. Trading Sprocket company needs to hedge their Euro trading. ZeroHedge has to buy more silver to combat trading manipulators. They options to buy stock in companies. Contrast that to gold and oil: From a structural standpoint, futures aren't "investments. I see two possibilities heading into futures summer months. If we get the options scenario, then correlations will ratchet up among stocks and it will be a macro game again. If the second comes along, then summer volatility and liquidity in equities will dwindle. Either way, commodity options trading is definitly coming back into my trading arsenal for options next few months. See How I Options Help You. Will RIMM Shake Up Shorts With Their Patent Portfolio? Get Your FREE Iron Condor Trading Toolkit Click Options to Download. Fear is In Both Directions If there commodity one thing to learn about options is that each futures will have a different implied volatility. Below is a picture from LiveVol showing the trading skew for SPY June Options: Compare that with the volatility skew for GLD June Options: That means the tail commodity can be on either side. Commodities Have Different Event Based Risk Single stock equities can be driven by upgrades, downgrades, earnings, FDA events, futures selling, holding updates, institutional rebalancing, intermarket correlation, same store sales Commodity Option Traders Are a Different Breed Remember, it comes down to the perception of risk. Why is risk bi-directional? Because the motivations in the commodities market are completely different than stocks. What's going on right now
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