Trading Options on Commodities
Unlike some of the assets traded as binary options, commodity options trading is not new. Indeed, some of the staple commodities such as rice have been traded for thousands of years. Commodities are raw materials and produce that are used throughout the world and are divided into two categories – hard commodities that include gold, silver and other metals, and soft commodities such as oil and gas. They therefore provide a wide range for commodities options trading.
Because commodities are used in manufacturing and other processes, trading commodity options is affected more than other forms by the law of supply and demand. Energy assets, such as crude oil and natural gas, can be affected by wars and natural disasters that limit supply, which then impacts on commodity options trading. Similarly, agricultural commodity prices are particularly sensitive to natural elements, such as drought, floods and disease, so these factors need to be taken into consideration when trading commodity options.
Agricultural commodities are also seasonal due to weather factors so commodity options trading in these assets will depend on the time of year and the producing country. Certain commodities, such as gold and other precious metals, are often bought during periods of economic instability because they are viewed as safe investments. This makes them ideal for commodity options trading. Gold and silver, in fact, have previously been traded as currencies as well as commodities.
Commodity options trading in this type of asset is often most profitable at times of high inflation and high liquidity. Metals such as copper that are used in manufacturing processes have increasing demand when economies are growing but the demand falls away at times of recession or low growth. This is reflected in the price of such metals and so provides opportunities when trading commodity options.
A big attraction of commodities options trading is that the assets are traded all the time and, because they are so sensitive to the law of supply and demand, their prices are changing constantly. They are affected in different ways by world events, which can often cause tremendous volatility in the markets for commodities options trading. History shows that prices change on average by 30% a year, often much more for particular assets, giving huge opportunities for profit when trading commodity options. The challenge for a binary options trader involved in commodities options trading is to identify when prices will change and the direction in which they will move.
Success in commodities options trading is often about being alert because a hurricane moving through the Gulf of Mexico can hit oil production and drive up prices while disagreements between two countries can escalate into war and disruptions to supply. Such events provide opportunities when trading commodity options providing you act quickly enough. If you can anticipate the way things are moving and the effect they will have, prompt action will lead to trading commodity options successfully.