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Trading Commodities using Binary Options

Commodities, which include, petroleum, natural gas, precious and base metals represent excellent instruments to trade binary options.  Commodities, as an asset class, are volatile instruments and therefore move dramatically from hour to hour and day to day.  Because of this nature, commodities create excellent opportunities to make robust returns.

The historical volatility of the majority of commodities is close to the 30 percent level.  This means that during the course of a year, the price of the underlying commodity instrument will move 30%.  The amount that the market believes it will move can be even higher.  In looking at the chart below, which is a graph of historical volatility and implied volatility of the USO, crude oil ETF, the implied volatility is 5% higher than the historical volatility.  This infers that the market believes that crude oil will move 35% during the course of a year.

Each commodity has points within the week or year when they represent excellent trading opportunities. 

Crude Oil

For Petroleum (crude oil), the weekly inventory report released by the US Department of Energy is a volatile time to trade the energy markets.  This report is released once a week on Wednesday at 1430 GMT, and can be found either on the Department of Energy’s web site or through a news web portal.  The inventory report shows inventory for crude oil, gasoline and heating oil, along with a number of minor petroleum products.  Expectations are summarized by different surveys, which reflect how analyst believes inventories will be reported.  The report lists inventories in the form of stocks held in different regions of the US.  For Crude Oil, the most important area of the country for inventories is Padd 2 or Cushing Oklahoma.  This region is where the WTI NYMEX Crude oil contract is priced and therefore this region holds a lot of weight.  For gasoline and heating oil, Padd 1, which is the Northeast of the US, the inventories in this region hold the most weight.  This is because this is where the gasoline and heating oil contracts are priced.  Additionally, the Department of Energy releases demand figures and import figures for all products.

A well-informed binary options trader could use the volatility that occurs after the release of the number to make solid trades.  Hit or miss trades above and below the market with percent payout that favor the investor would be smart educated trades.  

Natural Gas

Similar to the petroleum, the US natural gas market is very volatile and has an inventory release number that is reported by the department of energy on Thursday at 1430 GMT.  The inventory number shows how much natural gas is in storage at three specific regions of the country.  A trader could use this volatility to place above or below binary option, trades or range hit or miss trades.  Additionally, one-touch options would be a very interesting type of trade to place right before the release of the inventory numbers since the moves on the release are usually very volatile.

Copper

Copper is an industrial metal and is usually related to growth prospects around the globe.  As economies around the world expand and manufacturing demand increases, prices of copper increase in tandem.  As economies begin to contract and manufacturing and construction levels declined, the prices of copper also decline.  With this in mind, a binary option trader could use the purchasing managers manufacturing releases around the globe as opportunities to purchase specific binary options.  This can also be accomplished when GDP reports are released.  Purchasing managers are reported in US, the Euro Zone, the United Kingdom, China, and Canada (to name a few). 

Precious Metals

Gold and silver have historically traded as both commodities and currencies.  Gold and silver each have their own interest rate curves that create the shape of the long-term profile.  Similar to currencies these commodities use forward points to create the forward curve.  Potential inflation and periods of high liquidity usually benefit gold and silver, but they are also used in some industrial markets as well.  Gold and silver also trade very technically, and are good candidates to trade binary options on technical breakouts.

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Disclosure: No positions