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1. Commodity Options Trading Introduction

This commodity options trading introduction chapter describes the objective of this course, what futures options are and how you can profit by trading them.

A.   Objectives of this Commodity Options Trading Course

This trading course will give you the skills to analyze and select potentially profitable futures option trades. You will also learn how to incorporate various option strategies into your trading activities.

This is not a trading system. It is an educational presentation which uses common industry information and techniques to help you define a simple Trading Plan. You can use this trading plan to intelligently evaluate and select commodity markets that have the highest likelihood of becoming a successful trade. This course will teach you trading techniques that minimize your chances of loss while simultaneously enhance your ability to profit from "expected" market price movement. You will also need to define a Money Management Plan to control your risk and loss.

And finally, you need to paper trade for at least three months to develop the confidence and skills to be successful in your trading efforts. "Paper trading" means you use the knowledge gained in this course (along with the information in my Futures course) to pick the options that have the best chance of being profitable. When you paper trade, you get to learn how to "make all the right moves". It's an ideal way to learn – getting experience without losing your hard-earned money while you learn. You can track your trades on paper and see the profits you could have made. It's very easy, and after a few weeks of paper trading, you can see exactly how much money you would have made – without putting any of your money at risk!

By doing these things, you gain a significant advantage over other option traders.

I can't guarantee your success but I will do my absolute best to teach you how to trade intelligently.

At the end of this trading course, you will know how to more successfully do the following:

• Identify and interpret options contract specifications
• Analyze commodity options and identify the ones that suggest opportunity
• Understand and use several simple option trading strategies

Special Notice

The information in this Commodity OPTIONS Trading Course^TM frequently refers to, and uses, the information which is contained in my complete Commodity FUTURES Trading Course^TM. The reader is assumed to have obtained and mastered the materials in this course which is available on my web site at:

http://www.Learn-Futures.com

B.   Notices

The Commodity Futures Trading Commission and The National Futures Association requires the following notice be stated:

There is a Risk Of Loss in Futures and Options Trading.

I am not an investment counselor or a commodity trading advisor, nor do I give advice on specific investments. This educational trading course is designed to give you the skills and insight that will help you to trade commodity options more successfully.

Successful past results don't necessarily mean success in the future. There is a risk of loss in options trading. Do not trade using money that you can't afford to lose.

Over 90% of new people who trade options will lose money. The other 10% are successful for the following reasons:

• They learned about how the options markets work,

• They learned how to anticipate and identify changes in an option's price and position themselves to benefit from that price change,

• They have defined and use both a Trading Plan and Money Management Plan,

• They spent some time "paper trading" to prove that this method works.

This trading course will teach you how to do these things.

C.   Option Characteristics

Options have several characteristics which make them more attractive to some traders. They include:

• Limited Risk. An option buyer of either a simple Call option or Put option cannot lose more than the amount paid for the option, plus commissions. However, the profit potential is not limited. If price moves adversely after you purchase the option, you can let the option expire worthless. With a futures contract, when price moves against you, your losses will accumulate until the position is closed.

  Note: Option sellers must post a margin and are exposed to unlimited risk because they may be required to enter into a transaction at the discretion of the option purchaser. This is why selling options is riskier than buying options.

• Staying Power. Using options means that you don't run the risk of getting stopped out of a trade, especially when market volatility increases.

• Profit Is Not Limited. If you're correct in your analysis about the direction of price movement in the underlying futures contract, the profit potential is not limited.

• Quick Fills. You can quickly enter and exit markets at a reasonable price.

• No Margin Calls. Buyers of options pay the full amount for the option when they purchase it. This means the buyer will not encounter a margin call on an option position regardless of adverse price movement. In contrast, when you control a futures contract, you may be required to deposit more money if price moves adversely resulting in a margin call.

  Special Note: Options sellers may also be required to deposit additional margin when price moves adversely.

• No Limit Moves. Options are generally immune from the risk of limit moves which can sometimes occur in the futures markets.

• Numerous Strike Price Selection. Because options are generally available in a range of strike prices (defined in the next chapter), it provides you with financial flexibility in your trading activities.

• Lower Capital Requirements. Typically, the cost of buying an option will be less than the margin required to control a futures contract. This can provide you with huge financial leverage – when you correctly assess where the market price is likely to go.

• Provide Trading Alternatives. Options can be used as a substitute for protective stop (i.e., stop-loss) orders to prevent market fluctuations from stopping you out of what may ultimately become a profitable position. In addition, an option trader can speculate on factors other than market price direction – such as volatility and time decay – as the basis for generating profit.

• Learn How To Trade Risk-Free. You can paper trade to learn the skills you need to be successful without risking a penny.

D.   What You Will Need To Trade Options

Here's a list of things you need to successfully trade options.

• A trading account with a broker.
• A telephone to contact your broker
• A calculator
• Access to daily option prices
• Commodity Price Charts subscription (see Appendix A)
• About five minutes each night, plus about an hour every Sunday evening

It is on strong recommendation that you completely read this trading course three separate times. The first reading should be done to get the general idea of what is involved in the entire process – that is, you get a general grasp of things. The second time, read it to help reinforce your knowledge as well as help you to better understand the process presented in this course. The third reading will be helpful, as you should be ready to start defining your personal Trading Plan and Money Management Plan.

Resources you will find both helpful and necessary in your trading activities are described in the appendices.

The next chapter covers Commodity Options Trading Basic Terms.

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