Commodity options are agreements between buyers and sellers that give buyers the right (but not the obligation) to buy or sell a certain amount of commodity at a specified price on a specified future date. Any commodity, such as grain or crude oil, can be used as the underlying asset for a commodity options contract...
A buyer of the commodities option has the right to buy or sell the underlying option before the contract expires. However, the right to exercise the option of either buying or selling does not put the buyer under an obligation to exercise this option. At the same time, the seller is bound to buy or sell the underlying. To exercise this flexible option, a buyer pays a premium to the seller of the option...
Commodity options are of two types: call options and put options. In a call option, the buyer of the option has the right to buy the underlying commodity at a prescribed price on a date that is specified for the future. Meanwhile, a put option provides the right to sell the underlying commodity at a prescribed price at the prescribed future date. The price that is fixed to buy or sell on a specific date in the future is known as the strike price.
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