Before I get sidetracked, let me mention the fact that there are two types of volatility in commodity options trading (and really all options trading for that matter): Historical and implied. Historical volatility is basically the “track record” of a given futures market’s price swings. In other words, how stable (or unstable) have market prices been throughout history? There are all kinds of charting tools to measure historical volatility, and it’s good to study them to get a “feel” for how a market’s prices will have regular peaks and valleys, especially more seasonal-based commodities like the grains (corn, wheat, soybeans, etc.) and for the most part the softs (coffee, sugar, cocoa, etc.). Implied volatility is the kicker-it’s basically the market’s guess at how stable (or unstable) prices will be in the future. The basic reason why it is important to understand volatility is because it will tell you what your best plan of action is, as far as what type of position to take in the markets. If you expect volatility to increase, it’s NOT a good idea to write options. Conversely, if you expect volatility to decrease, buying options will prove to be a disappointment, because time decay will “do its dirty work” on the option’s premium, and you’ll see your profits (if any) eroding away right with it. So, to put it in a positive light, if you believe that volatility will increase, it’s better to buy options, and if you believe that volatility will decrease, it’s better to sell (or write) options.

Well, I have to sign off for now; I’m actually about 20,000 feet in the air, making my descent into Atlanta. I just thought that I would take the time to post some more thoughts about commodity options trading while I was in flight…it’s amazing how (and when) inspiration will hit.