What Are The Advantages Of Commodity Option Trading Over Equity Options?
While there are different markets that investors can venture into such as equity market involving major currencies, the commodity option trading represents a good opportunity to help investors diversify their investments. It is important for investors to make wise decisions when they are investing in forex trade, equity, or commodity options. There are many advantages of trading in commodity options over equity options and they include:
Low margin requirement
One factor that attracts investors to trade in commodity options market is the low margin requirement, which indicates the possibility of higher returns on investment. The margins that are posted in order to hold short stocks options could be as high as 10 to 20 times the premium that are collected from the option trades.
Poor liquidity in equity options
Traders often complain of aspects such as poor liquidity in equity options, which hampers their effort to either enter or exit positions. Some futures contracts may have high open interest when compared to others. However, most of the major contracts such as gold, natural gas, financials, and crude oils are likely to have substantial volume as well as open interest thus allowing traders to have several thousand open contracts in each strike price.
The aspect of fundamental bias
When you are selling stock options, the prices of the stocks are influenced by many factors, which include the corporate earnings, the legal actions, the market directions, comments by CEOs, and regulatory decisions. When there are major announcements to be made or new on a particular contract or commodity, it may influence the change in prices. But one notable thing about the commodity market is that the analysis of supply and demand of the commodities is cleaner and it can help when you are trading in this market.
Diversifying your investment
Many investors want to diversify and not just have equity options. When you expand your investment to commodity options, you are getting an investment that does not directly correlate to equities. In many stocks, their option prices moves at the mercy of the index for example, if you had the Microsoft stock price falling, it would most likely that Exxon is also falling. However, with commodities such as natural gas and gold or silver, their price changes are not correlated. This is one thing can help in leveraging risks of loss.
When choosing a broker to trade in commodity market, you should make sure you only deal with those who have recorded good performance. Although it is said that past performance in not an indication for future performance, you need to ensure you do not invest with a trader who will keep on losing your money. Chikarafx, a Costa Rica broker that has been in business for many years, and which offers managed commodity trading accounts, it can be your companion in option trading investment.
There you have it-now you know the advantages of commodity option trading. You can now make better investment decisions.
Tim Ferguson is the author of this article on financial advisor. Find more information, about costa rica here