Options trading in commodities is widespread globally with major exchanges like CME, NYMEX, LME and ICE offering options on commodities ranging from gold to oil to industrial metals.
‘Options’, as the word suggests, refer to choices or alternatives. An option is a derivative contract which gives the buyer (the owner or holder of the option) the right, but not the obligation, to buy or sell an underlying.
A contract permitting the option buyer the right, without obligation, to buy or sell an underlying asset in the form of a commodity, such as precious metals, oil, or agricultural products, at a designated price until a designated date
The option buyer will exercise their option only when the price of the underlying is favourable to them, otherwise they will let the option expire worthless.
A trader may look at options differently compared to a commodity producer looking to hedge his price risk. A hedger would be interested only in protecting his margins by mitigating price risk while a speculator is interested in profiting out of market moves.