The Commodity Trading Game Plan


Options, Futures, or Both

Commodity speculators have an unlimited number of "options" when it comes to trading vehicles. The key is to find an approach that will provide you with a manageable risk profile, while still leaving the potential for a profit that you will be satisfied with. Throughout the process, keep in mind that the relationship between risk and reward isn’t linear. Only a fine balance between the two will allow the trader the probability of a reward rather than the dream of one. Accepting reckless amounts of risk may pay off for a lucky few, but for the masses the results will be dismal.

Depending on the characteristics and personality of the trader, a stock market bull might purchase an e-mini S&P futures contract, purchase an e-mini S&P 500 call option, sell an e-mini S&P 500 put option, or even use a combination of long and short options and futures contracts, to construct a trade with various risk and reward prospects.

Likewise, a crude oil bear might opt for a limited risk option spread such as an iron butterfly or he be willing to accept large amounts of risk and volatility by choosing to short a futures contract outright. I couldn't possibly touch on each of the commodity market strategy possibilities in within the realm of this article but you should be aware of the opportunities available to you, and which fits your personal trading profile, before ever putting money on the line. If you are interested in exploring commodity trading strategies outside of simply buying or selling a futures contract, you might find my book “Commodity Options” helpful. It outlines several commodity option spreads and even synthetic strategies in which futures and options are combined to construct a hedged position in the futures markets.

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