Legal Definitions - commodity option

A commodity option is a type of financial contract that gives the holder the right, but not the obligation, to buy or sell a specific commodity at a fixed price within a certain time period. It is a type of option, which is a financial instrument that gives the holder the right to buy or sell an asset at a predetermined price.

For example, let's say a farmer wants to sell their crop of wheat, but they are worried that the price of wheat might go down before they can sell it. They could buy a commodity option that gives them the right to sell their wheat at a fixed price, even if the market price drops. This protects the farmer from potential losses.

Another example is a company that uses a lot of oil in their manufacturing process. They could buy a commodity option that gives them the right to buy oil at a fixed price, even if the market price goes up. This protects the company from potential price increases.

Overall, commodity options are a way for individuals and companies to manage their risk when dealing with commodities.