Commodity options have always stepped forward as a diverse form of investment that provides investors with an opportunity to go beyond the usual line of work. As numerous elements revolve around the market, it has changed through time with a lot of practices coming into effect. But one can never proceed to understand the same if they do not have a clue about the call option. Apart from being an essential aspect of trading commodities, the call option is also an essential one. So to be more specific on this front, here’s a brief take on the call option on trading commodities.
We are all aware of the fact that there are two types of commodity options. While the put option is also an important one, today we will be looking exclusively into the call option. Understanding what it means and how it takes shape stands to be the primary ingredient of success. Just like the put option, the call option gives the buyer the right to buy a particular asset
at the stated strike price. But that right does not mean obligation and the process also comes forward with a specific period.
At the same time, the seller of a call option is obligated to deliver a long position in the futures contract from the strike price if the buyer opts to exercise the option. Ideally, this means that the seller will have no other choice but to take a short position in the market. While the many aspects of the process need to be utilised to the right extent, it should never involve methods that don’t count as legal.
2. Different Types of Uses
When it comes to its primary purpose, call options are utilised for specific reasons that commonly involve purposes like tax management, speculation and income generation.
Using the call option for tax management purposes involves allocations without actually buying or selling underlying security. In the wake of not wanting to create a taxable event, shareholders move ahead to use options to reduce the exposure to the underlying security
without selling the same.
Since the options contract provides buyers with the opportunity to obtain exposure to a stock for a small price, they can be used in isolation, and a significant return can be gained when the stock rises. As the individual is using the call option, the risk will always be capped at the premium paid for the option.
By using a covered call strategy, investors can generate income. The procedure takes shape by involving an underlying stock while also writing a call option or providing the right to purchase to another individual. Moreover, the investor also collects the option premium and makes matters meet for the option to expire below the strike price....
23 July, 2020