Understanding Commodity Markets
Learn how major commodity markets work, what influences commodity prices and how options can provide exposure to commodity-related markets. Explore educational information covering precious metals, energy, agriculture, livestock and industrial metals.
What Are Commodity Markets?
Commodity markets are markets based on physical resources and products such as precious metals, energy products, agricultural goods, livestock and industrial metals.
Commodity prices can respond to changes in supply and demand, production levels, inventories, weather, transportation, economic conditions, geopolitical developments and other factors affecting the global economy.
Understanding these underlying markets is an important part of understanding commodity-related trading instruments, including options.
Major Commodity Categories
Each commodity market has its own characteristics and price drivers. Explore the major categories below.
Futures and Commodity Options
Futures and options are different financial instruments used in connection with commodity markets. Understanding the distinction is important when researching commodity trading.
Commodity Futures
A futures contract generally represents an agreement to buy or sell a commodity or related contract at a specified price and date. Futures markets are used extensively for price discovery and hedging and can involve significant financial risk.
Commodity Options
An option on a futures contract gives the buyer the right, but generally not the obligation, to buy or sell the underlying futures contract at a specified strike price, subject to the terms of the particular contract.
For a purchased option, the premium paid represents the amount invested in the option. The option can expire without value, resulting in a loss of the premium paid. Options can also involve substantial risk, and investors should understand the applicable terms and risk disclosures before participating.
What Moves Commodity Prices?
Commodity prices can change rapidly as physical supply, demand and financial market conditions change. Important influences can include:
- Global supply and demand
- Production and inventory levels
- Weather and seasonal conditions
- Economic growth and industrial activity
- Transportation and infrastructure
- Geopolitical developments
- Government policies and regulations
- Interest rates and broader financial conditions
Why Study Commodities?
Commodities are closely connected to the global economy. Energy products affect transportation and production, industrial metals are important to manufacturing and infrastructure, while agricultural commodities are influenced by weather, production and worldwide demand.
Precious metals such as gold and silver can also respond to changing economic conditions, currency movements, interest rates and investor sentiment.
Because different commodity markets can respond differently to economic events, understanding the underlying market can be useful when evaluating commodity-related investment strategies.
Option Trader Pro
Option Trader Pro provides information and online account services relating to commodity trading and commodity options.
Clients considering an account can review the available information, complete the application process and obtain additional information about the applicable account structure and trading arrangements before proceeding.
Commodity and options markets involve risk. No trading strategy can guarantee a profit, and past performance does not guarantee future results.
Continue Exploring Commodity Markets
Explore the individual commodity categories or learn more about commodity options and the account application process.
Commodity Options Open an AccountRisk Disclosure: Commodity and options trading involves substantial risk and is not appropriate for every investor. Market prices can move rapidly and an option may expire without value. For purchased options, the amount invested in the option is the premium paid, which may be lost. Past performance is not indicative of future results. Information presented on this website is general in nature and should not be considered a guarantee of investment performance or a recommendation that any particular strategy or account is suitable for a specific investor. Please review all applicable account documentation and risk disclosures before investing.