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Commodity Trading Vs Binary Options

Advantage Binary

Commodity trading has become very attractive to investors in the last few years. The buzz has been around the price of Gold which has continuously gone up for the last 2 years (2009-2011) and the price of oil which has an impact on all of our lives.

However, how can you trade gold, oil, or even other commodities like corn, sugar, or even copper? There are 4 main methods to trading commodities.
1.    Futures: This is the classic and oldest method. Here, you will need to BUY or SELL a contract on a specific commodity at a specific commodity market. The real purpose of this market is not investment but rather supplying actual commodities to the market or hedging for suppliers, retailers, manufacturers, and others.  Problem here is that-
a.    you need to know which market to buy and sell from – sometimes very confusing
b.    if you don’t sell your contract in time, the actual commodity will be delivered, literally to your house. I don’t think traders are interested in actually having 100 lots of corn in their backyard.
c.    you are only able to go in 1 direction (either buy or sell)
d.    Commissions can get expensive
e.    No hedging
f.    Leverage is very low

2.    ETFs: you can buy and sell ETF (Electronic Traded Funds) at stock markets. These are sort of like buying a bus ticket when you want to drive a car. So we don’t recommend this way as it is expensive and only “follows” the actual market and doesn’t actually give a clear indication of where to buy and sell. In addition, they aren’t liquid, meaning you can’t get in and out of a trade at will.

3.    Spot Trading: This is probably the most popular method today. With “Spot Commodity Trading” you are buying a similar product to the futures but with huge leverage. Seems very attractive, except that commodities tend to be very very volatile intra-day. Meaning, you can lose your investment in minutes. But it’s cheap and flexible.

4.    Binary Options: with binary options you get the ability to buy and sell based on the Spot price but don’t need to be leveraged so you can control your investment and risk.

With Binary Options, you get a greater amount of control as compared to spot trading. For 99% of traders only spot and binary option trading will make any sense to begin with. However, very few spot traders are trading binary options, and this is a big mistake for many reasons. On the one hand, we strongly recommend trading spot.

However, if you are what we call “naked” in the market (where you simply Buy or Sell a commodity with no hedge or other form of risk management) you are in serious trouble. For those who already trade spot, we would recommend utilizing binary options to hedge your risk.

The cost is relative to your investment and you can even “roll over” your option for the life span of your spot trade. This means you have protection. So as opposed to trying to sail the Pacific ocean in a storm with no life-vest, binary options give you a life –line so you don’t have to take on unwanted risk but still enjoy the reward potential of spot trading. It’s the perfect mix.
For those who never traded spot, we love the idea of staying in binary options only.

Although the profit potential is lower, so too is the risk. So for beginner traders who don’t yet know the swings of commodities, it is a much easier place to learn about trading as compared to the spot market.

 

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