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Aluminum Options Explained
Aluminum options are option contracts in which the underlying asset is an aluminum futures contract. The holder of an aluminum option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying aluminum futures at the strike price. This right will cease to exist when the option expire after market close on expiration date.
Aluminum Option Exchanges
Aluminum option contracts are available for trading at London Metal Exchange (LME) and New York Mercantile Exchange (NYMEX).
LME Aluminum option prices are quoted in dollars and cents per metric ton and their underlying futures are traded in lots of 25 tonnes (55116 pounds) of aluminum.
NYMEX Aluminum options are traded in contract sizes of 44000 pounds (19.96 metric tons) and their prices are quoted in dollars and cents per pound.
| Exchange & Product Name | Underlying Contract Size | Exercise Style | Option Price Quotes |
| LME Aluminum Options | 25 ton (Full Contract Specs) | American | N.A. |
| NYMEX Aluminum Options | 44000 lb (Full Contract Specs) | American | Calls | Puts |
Call and Put Options
Options are divided into two classes - calls and puts. Aluminum call options are purchased by traders who are bullish about aluminum prices. Traders who believe that aluminum prices will fall can buy aluminum put options instead.
Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.
Aluminum Options vs. Aluminum Futures
Compared to the outright purchase of the underlying aluminum futures, aluminum options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that has the potential to expire worthless.Additional Leverage
Compared to taking a position on the underlying aluminum futures outright, the buyer of an aluminum option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying aluminum futures.Limit Potential Losses
As aluminum options only grant the right but not the obligation to assume the underlying aluminum futures position, potential losses are limited to only the premium paid to purchase the option.
Flexibility
Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.
Time Decay
Options have a limited lifespan and are subjected to the effects of time decay. The value of a aluminum option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.
Related Articles
- Aluminum Futures Basics
- Buying Aluminum Futures to Profit from a Rise in Aluminum Prices
- Selling Aluminum Futures to Profit from a Fall in Aluminum Prices
- Aluminum Call Option Trading Basics
- Aluminum Put Option Trading Basics
- Hedging Against Rising Aluminum Prices with Aluminum Futures
- Hedging Against Falling Aluminum Prices with Aluminum Futures
How to Start Trading Aluminum Options
To buy or sell aluminum options, you need to open a trading account with a broker that handles futures options trades. Most online options brokerages out there only deal with stock options and only a few such as optionsXpress lets you trade BOTH stock and futures options. optionsXpress also provide a virtual trading platform where beginners can try out futures and options trading in real market conditions without using real money.
