Commodity options are options based on commodity. Commodity option is a right but not an obligation to trade a commodity at a specific price. Commodity options are used by agricultural producers, commodity purchaser, investor, and speculator. Each of them has their own goal for using commodity option. Agricultural producers and commodity purchaser buy option for hedging. Investor and speculator use this option to make profit.
Agricultural producers or farmer uses commodity options to reduce their risk of loss because of commodity price change. A farmer who planted wheat buy options so they can sell their wheat at a specific price. At the time he planted the wheat it was $ 300 per bushel and he hope that the price stays at $ 300 per bushel in order to make profit. If for some reason the price drops to $ 250 per bushel the farmer won't be making any profit. To reduce his risk the he bought put option so in the future he can sell at $ 300 per bushel.
