Buying options on commodity futures has the chief advantage of allowing you to profit from favorable moves in prices while at the same time, limiting your risk to the amount paid for the option plus commission and other transaction fees. For example, if you pay $500 for an option (including all fees), then this is the most that you can lose - no matter what. This fixed downside loss is of great appeal to those who have limited trading funds or who desire less risk than, say, trading commodity futures.

If you think that prices will increase, then you will buy a call option. If you think that prices will decline, then you will buy a put option. If, after buying an option, prices move your way, then your commodity option will increase in value, meaning that you'll be making money and, should prices ever move against you, your absolute loss will be limited to what you paid for the commodity option. For more information, please see Understanding Commodity Options at right.

Options exist on many commodities such as cotton, sugar, and crude oil, and on currencies such as the Canadian dollar and the Euro, and on broad stock market indices such as the S&P 500. Each of these is a commodity futures contract and you will buy a call or put option on that futures contract. Don't be confused by this. It simply means that you need to look at the price of the commodity futures contract as this is the price on which the option is based. Options on commodity futures can also be referred to as commodity options.

It will take a bit of time to understand commodity options, but the investment is well worth it. After all, education is a key to successful trading. Be sure to check out our specialty web site on buying commodity options where you'll find, among other topics, detailed information on:

• Buying Commodity Call Options
• Buying Commodity Put Options
• Buying Bull Call Spreads
• Buying Bear Put Spreads
• Executing the Option Order
• Managing the Option Spread

At this specialty site, you'll also find examples of option and option spread trades for various commodity markets such as gold, crude oil, the Euro currency, the E-mini S&P 500, corn, sugar, cotton, frozen concentrated orange juice and coffee. Each example includes information on reading option prices and choosing the option strike price.