Options on Commodities

[garethb]

Since many regulars here favour options selling but IV is at historic lows in many of the financial markets, has anyone considered applying their strategies to Commodities markets?

Obviously there is a whole new range of fundamentals to get to understand and my impression is that individual markets often see long term trends so strategies might need to be more directional rather than straddles/strangles.

Anyone given it any serious thought, or perhaps already doing it?

 

[RogerM]

Hi Gareth - welcome to the options forum.

I've not looked at options directly on a single commodity, but been looking at options on some of the ETFs and SPDRs on the NYSE. There are plenty of these that deal with commodities, such as the XLE which is made up of shares in the energy sector.

Have you any experience in commodity options? Always willing to learn something new!

 

[garethb]

Hi Roger,

No direct experience of commodities trading but have recently been doing some investigation on markets/fundamentals and casually researching brokers etc. Have sold a couple of very small strangle positions on FTSE (Jan and Feb expiry) via Spread Bets and ended possitive on both. My interest is in looking for good markets for Options Selling rather than specifically being a Commodities enthusiast.

I will investigate ETFs as I will be able to get real time options prices on those though my US Securities Broker.

 

[TWI]

I have used options extensively in commodities. Probably the best use is to write OTM puts when the markets are cheap and you want to buy a the chosen strike. I never write more than I am prepared to take on as a long assignment. Great if you are scale trading as it adds premium to your strategy which would otherwise not be there. This has been particularly good in the last couple of years when the commodities have had periods of under performance. OTM calls are also a useful instrument if you have a position and a mind to get out at a fixed target price in the same way as writing puts to take the long assignment.

 

[garethb]

Roger,

Looking at XLE it doesn't really correlate well with the price of Crude and seems to be much more of a sector play on Oil Producers/ Oil Service companies. But then perhaps sectors could be a place to look for volatility not present in the broad indices while still avoiding the huge event risk possible with stocks. Options volume on XLE seems to be overwhelmingly on the Put side today, ATM and OTM March and April which I guess is understandable given the recent gains.

Gareth