Selling options is a alpine probability trading strategy, on the contrary the risks involved in any one Commerce are higher quality than the risks involved when buying options. When you sell an alternative, you select a credit to your trading legend in the configuration of a premium paid by the alternative buyer. Whether the choice expires without the buyer exercising, you Testament retain the premium. On the contrary, provided the options is exercised, you Testament desideratum to counterbalance your position to Way out the commodity bazaar.
Instructions
1. Unfastened an bill with a commodity futures broker. There are various factors to consult when choosing a broker. These contain matters approximative commissions, statement minimums, online trading platforms and customer buttress. The CME Party has an lingering listing of U.S. brokers on their website.
2. Evaluation with the broker to fix upon the chronicle requirements for alternative selling. The risks involved in preference selling are consubstantial to the risks involved in futures trading. Consequently, most brokers Testament probably corner the duplicate account requirements for both kinds of trading. However, your broker may offer more lenient terms if you only plan on selling commodity options as part of a spread trading strategy in which you buy an equal number of offsetting options.
3. When selling an option, specify a quantity, option variety, market and strike price. For instance, you might call your broker and place an order by saying, "I'd like to sell one December wheat call option at a strike price of 705." Commodity markets are divided by the month in which they expire, so December, March and May wheat are three separate markets.
Additionally, options are divided into calls and puts. Calls are options to buy a market while puts are options to sell a market short. Since you are selling these options, you should sell a call when you expect the market to go down and sell a put when you expect the market to go up. Finally, the strike price is the price at which the option buyer may exercise the option. When selling options, you want to avoid exercise so you should pick a strike price that the market will not cross during the life of the option.
4. To shut the trade, either let the option expire or enter an offsetting position. To exit the market, you would simply buy an offsetting December wheat contract to exit the market. Ideally, when you sell an option, the option will expire without any intrinsic value and you will retain the premium you received when you sold the option. However, if the option becomes profitable and the option buyer chooses to exercise, you may be forced to enter an offsetting position to chop your losses. For instance, if you sell a December wheat call and the option buyer exercises, you would be short the December wheat market.
