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Zinc Options Explained
Zinc options are option contracts in which the underlying asset is a zinc futures contract. The holder of a zinc 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 zinc futures at the strike price. This right will cease to exist when the option expire after market close on expiration date.
Zinc Option Exchanges
Zinc option contracts are available for trading at London Metal Exchange (LME).
LME Zinc 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 zinc.
| Exchange & Product Name | Underlying Contract Size | Exercise Style | Option Price Quotes |
| LME Zinc Options | 25 ton (Full Contract Specs) | American | N.A. |
Call and Put Options
Options are divided into two classes - calls and puts. Zinc call options are purchased by traders who are bullish about zinc prices. Traders who believe that zinc prices will fall can buy zinc 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.
Zinc Options vs. Zinc Futures
Compared to the outright purchase of the underlying zinc futures, zinc 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 zinc futures outright, the buyer of a zinc option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying zinc futures.Limit Potential Losses
As zinc options only grant the right but not the obligation to assume the underlying zinc 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 zinc 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
- Zinc Futures Basics
- Buying Zinc Futures to Profit from a Rise in Zinc Prices
- Selling Zinc Futures to Profit from a Fall in Zinc Prices
- Zinc Call Option Trading Basics
- Zinc Put Option Trading Basics
- Hedging Against Rising Zinc Prices with Zinc Futures
- Hedging Against Falling Zinc Prices with Zinc Futures
How to Start Trading Zinc Options
To buy or sell zinc 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.
