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D. Commodity Options Trading Common Questions

The option I purchased is approaching expiration but it is not in-the-money. What should I do?
When you buy an option, you have the right, not the obligation, to exercise the option. You would only exercise an option if it is profitable to do so. However, most options are liquidated rather than being exercised. If the option has no value, you can let the option expire worthless. If some time remains before the option expires, you can still liquidate the option and recover a portion of the price you paid for the option.

Do I have to exercise an option to realize the profit?
No. It is better to liquidate the option, rather than exercising the option. If you exercise the option, you will incur an additional commission expense.

What if I forget about my option, and it expires in-the-money?
Options that are in-the-money at expiration are automatically exercised into a futures position, unless you state otherwise. If you are monitoring your positions daily, this should not happen to you.

How do I figure out the dollar cost of an option?
The actual cost of an option is the premium amount multiplied by the contract value. For example, in the grain markets, the contract size is 5,000 bushels. If the premium is 9 cents, then multiply .09 x 5,000, and you get $450. See Appendix B for more information about how to calculate the cost of option premiums.

What is the margin requirements for buying an option?
There is no margin requirement for buying options. Your loss is limited to the amount of the premium paid for the option. However, to purchase an option you must have the full value of the premium in your account before the transaction can be executed.

What happens when you exercise a long option into a futures contract?
As the holder of a long option, you have the right to exercise your long option whenever you wish. However, you cannot exercise short calls or short puts – that right is reserved for the option purchaser. A long call can be exercised into a long futures contract and a long put can be exercised into a short futures contract. In either case, the strike price of the option is the entry price of the futures contract.

If I sell an option and the premium increases, do I lose money?
Yes. If you received $400 for the sale of an option and it is now worth $600, you will incur a loss of $200 when you liquidate the position.

If I sell a call option and it is exercised, what does this mean?
If the option is exercised, the buyer will be long a futures contract at the strike price. You will be assigned, which means you are obligated to go short the same futures contract at the strike price. However, you may close out the futures position, and you should do so if you are assigned to avoid significant loss.

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