How do commodity options compare with other investments involving a similar risk to reward ratio?
Obviously, no two investments have exactly same risk to reward characteristics. One characteristic of options is that, to be profitable, the anticipated price movement has to occur within the time frame of the particular option you have selected. In addition to their limited risk, commodity options have a number of distinct advantages; these include:
The opportunity to profit whether the price of a given commodity is expected to go up (by buying calls), or go down (by buying puts). This advantage should be readily apparent to investors who have frequent reminders that prices in a dynamic economy can move sharply downward as well sharply upward. Option profits can be realized in both market environments. Indeed, as easily in one as in the other.
Options on futures can provide the investor with diversification. Commodities are considered a separate asset class and have no direct correlation to stocks, bonds or mutual funds.
Because of the leverage options provide, a given sum of investment capital can readily be divided among a number of different market sectors simultaneously- such as oil, metals and livestock. This diversification can improve your likelihood of “being in the right place at the right time”.
Options may be the least expensive way to acquire an interest in just about any commodity. For example, buying a call option on oil in anticipation of rising energy prices may be considerable less costly that purchasing an interest in a oil well.