From CME Group:

Commodity prices are subject to short-term price shocks due to inelastic supply and demand. Short-term options can be used around key demand and supply report releases, such as inventory reports and production data. Specific events for different commodities include EIA weekly inventory reports for energy and USDA reports for agriculture, among others.

A macro hedge fund manager uses weekly copper options to hedge the release of the ICSG Copper Market Report. The report could potentially have a bearish impact on the market, and the manager wants to protect against that. The strategy involves purchasing 10 protective put options with a strike close to the current futures price, with a cost of $12,500.

After the bearish release of the ICSG Copper Market Report, the new copper futures price drops to $3.80 per pound. The intrinsic value of the put option increases to $150,000, resulting in a profit of $137,500 for the fund manager. This example demonstrates how options can be used to hedge against downside risks.



Read more: Short-Term Options in Commodities: Potential Benefits and Applications Part 2