Legal Definitions - London commodity option

A London commodity option is a contract that allows the buyer to purchase or sell a futures contract for a commodity that is traded on the London markets. This contract is agreed upon for a specific price and within a particular time frame.

Let's say that a farmer wants to sell his wheat crop, but he is worried that the price of wheat will go down before he can sell it. He could enter into a London commodity option contract with a buyer, which would allow him to sell his wheat at a specific price, even if the market price drops. This would protect him from any potential losses.

On the other hand, a baker might want to buy wheat for his bakery, but he is worried that the price of wheat will go up before he can purchase it. He could enter into a London commodity option contract with a seller, which would allow him to buy the wheat at a specific price, even if the market price goes up. This would protect him from any potential price increases.

These examples illustrate how a London commodity option can be used to manage risk and protect against potential losses or price increases.