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Tuesday, 24 January 2017
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Making the Most of Commodities

Commodity Breakdown

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The commodity breakdown binary options strategy involves looking for disparities between current commodity prices and future outlooks. It is a strategy that involves both a look at long term fundamental analysis for the foreseeable future, but also looking at technical indicators to figure out when these two points of view are not in sync with each other. It is a strong strategy, but one that is far more effective for minor commodities than it is for the major ones.

Application to this Breakdown

This strategy begins with a long term outlook on a commodity. Finding out the fundamental information of a commodity is not quite as scientific as it is with currencies and stocks/indices, but it is not too difficult. Start with looking at the current price of the asset in whatever the accepted unit of measurement is. For oil, this will be the barrel. For gold, it’s the ounce. And so on. Start with the current price of the asset, and look at current supply and demand. Next, look at current production and shipment information.

The next step is to look at future changes. For example, if oil supply is expected to drop, scarcity increases and demand becomes heavier in comparison, driving the price up. The magnitude of the change that will occur is dependent on how serious the changes are, and how lasting the impact is expected to be.

One of the easiest ways to show how to use this strategy is with a real life example. We will start by looking at avocados. Close to the beginning of October, 2016, it was determined that the avocado harvest would be much less than what was expected. While this report is still early in the stages at the time of writing this, estimates say that the harvest of this crop coming from Mexico is only about half of what was expected for the year. The end result is that avocados are going to be far more scarce going into the winter than what was expected, and this will drive prices up dramatically. As a result, short term futures are going to go up thanks to this piece of information. Long term futures—those being a year or more in the future—are uncertain in their nature, but if the short term price is rising thanks to scarcity, there will undoubtedly be a long term rise as well.

Applying this kind of a principle to other commodities with similar scenarios is very possible. We’ve seen this happen with durum wheat recently, too, which is often traded at binary options brokers. Prices tend to stabilize quickly with larger commodities, but because the avocado has such a small market niche, it is uncertain just how quickly things will turn around here.

Drawbacks to this Method

As stated above, this strategy is much stronger when looking at the minor commodities than it is for major commodities. The commodities that most binary options brokers offer will not be impacted as heavily as other commodities will. There are still many trading opportunities that will be uncovered with this strategy, but you will find that you are limited in the usefulness of this strategy if your broker does not offer a huge number of commodities. Unfortunately, most brokers only have a handful of this type of asset because it is the asset class that is given the least amount of attention by binary brokers.

Also, you will find that short term binary options—particularly those that are for less than 12 hours in length—are not nearly as accurate as those that are about 24 hours or longer before expiry. Finding a broker that offers the perfect expiry for you will sometimes prove to be a challenge.


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