Beginning Commodities Trading?

Here are a few facts that you will need to know before trading commodities or futures:

Buying commodities and trading them can take considerably less money than buying stocks outright but the risk involved is much higher as well. Below are some terms that you will need to know:

• Call Option– This is where two parties agree to exchange ownership of a stock at an agreed upon price within a certain time period. The reason that it is called an option is because the owner has the option to sell but not the obligation.

For example: Let's say that you believe that company xyz's stock will hit the price of $35 buy the end of February. You can buy a call option from an individual that owns that stock to buy it at that price. The closer the stock price get's to $35 within the agreed upon period of time the more valuable the call option is.

The danger of options is that the closer you get to the expiration of that option the less that it will be worth.

• Put Option – An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares (investopedia.com )

Ex. You believe that the price of a particular stock is about to go down. You can buy the option to purchase that stock at the lower price. The further down that the stock goes within the prearranged time period the more valuable it will be.

• Option Expiration – Options expire the third Friday of the month.You can buy an option that is further out and the option expiration date would be the third Friday of that month.

Ex. It is June and you believe that the price of a stock will increase to $45 by December. You can buy a December call. That option would expire the third Friday of December.

• "Triple witching hour" – This occurs the third Friday of March, June, September and December. At this time options, index futures, and options on index futures expire at the same time. Expect higher volitility and volume at this time.

.More information on how commodities and futures can be found throughout this site.