Commodity trading is not suitable for everyone. The risk of loss in trading can be substantial. This material has been prepared by a sales or trading employee or agent of Van Commodities, Inc. and is, or is in the nature of, a solicitation. This material is not a research report prepared by Van Commodities, Inc. Research Department. Please view our Risk Disclaimer.
Option valuation is not as straightforward as futures valuation. Option premium is comprised of intrinsic value and extrinsic value.
An option has intrinsic value if the market is trading above the strike price of a call option, or below the strike price of a put option. If a option contract has intrinsic value it is called “in the money.” If a option contact does not have intrinsic value it is called “out of the money.”
For example:
If wheat is trading at $6.50 a $6.20 call option is $.30 in the money so the intrinsic value of the option is $1,500.
The extrinsic value of the option is its “time value.” Extrinsic value takes into account the possibility that an option may go in the money by expiration. The more time that a option has the more extrinsic value it has. As a option approaches it expiration date is looses value. This is called time decay. At expiration a option has no extrinsic value so if the option is out of the money it expires worthless.
Wheat option prices do not move in tandem with futures prices. A $.01 move in your favor in the wheat futures markets does not necessarily equal to a $.01 increase in the wheat option value. The amount that a option value will increase based upon a increase in its futures price is called its delta. Call option deltas are measures from 0 to 1. As a option goes from “out of the money” to “in the money” its delta increases.
For example:
If a wheat call option has a delta of .5 and the price of the wheat futures market increases by $.01 the value of the option will increase by $.005 or $25.
Wheat Options
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Commodity trading is not suitable for everyone. The risk of loss in trading can be substantial. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Carefully consider the inherent risks of such an investment in light of your financial condition. Past results are not necessarily indicative of future results. Please do your own research before investing in the futures market. This site contains no investment recommendations. The information and opinions contained herein comes from sources believed to be reliable, but are not guaranteed as to accuracy or completeness.
