Commodore Options
Commodore options are an exotic contract type that functions as a series of barrier options. In this guide, we provide a 101 look at commodore options trading. We explain how they work with detailed examples and provide tips on how to start trading.
Below we list the top-rated brokers that offer retail options trading in 2024.
What Are Commodore Options?
One of the less common members of the options trading family, commodore options are a type of derivative that affords additional control to investors. Commodores are essentially a series of barrier options which pay out if the price of the underlying asset (such as Meta Inc or Bitcoin) climbs above a set level.
Barriers are set over a fixed period, meaning if the underlying asset hits those barriers, a coupon is paid out for an agreed percentage. Typically, these options are long-term and spread over several years with the set barrier increasing over time. All options are active as soon as the trade is placed.
Example
Commodore options trading is perhaps best explained by taking a look at a simple example…
Let’s say that an investor purchases an option on the FTSE 100 Index. The option has a 1.5% barrier threshold and runs for two years, with each barrier reaching maturity after six months. If a barrier is met, the commodore option will pay a 7% coupon.
If, for instance, at the time of purchase, the FTSE 100 Index is trading at 7,208.81, to hit the first barrier after six months, the index must be trading at 101.5% of the original value. This means that the FTSE 100 must be at a quote value of 7,316.94. If that is the case, the investor will receive a coupon worth 7%.
The same logic would follow for the next three six-month intervals. After 12 months, the index must be trading at 103% of the original value (7,425.07 after a year). Again, after the next six months (18 months total), the FTSE 100 index must trade at 104.5% of the original value (7,533.21) and finally, after 24 months, it must be trading at 106% of the value at the time of purchase (7,641.34).
Once the commodore option has been purchased, all of the separate barriers are active. This means that, even if the FTSE 100 index does not hit one of the earlier barriers, the trader can still receive a coupon if the value spikes and hits the level of a later one. If the investor’s commodore option hits the level of each barrier at the six-month intervals, they will receive a total of 28% worth of coupons.
History Of Commodore Options
Commodore options are named after their origin, which is linked to the performance of a leading UK stock index. For this, a coupon worth 6% per year was paid out if the level of the index increased by 2% after one, two and three years. As such, year one required the index to hit 102%, year two 104% and year three, 106%.
The trader’s investment received three times the performance of the UK index, and the exotic options structure and the program gained the nickname Commodore after the hit single from the Seventies, Three Times A Lady, performed by The Commodores.
Pros
Key advantages of trading commodore options include:
- Fixed risk
- Suitable for longer-term traders
- Limits downside exposure to a volatile stock market
- The trader receives multiples of the total return of the asset
- The coupon exceeds the performance of the underlying asset
Cons
There are also drawbacks of trading commodore options:
- They are not suited to short-term day trading strategies
- If the barriers aren’t met on time, the trader will receive nothing
- The trader could end up with less profit than a standard call option
Trading Commodore Options Strategy
Commodore options trading is most suited to a long-term strategy. With this type of option, a series of barriers are set in one direction, each of which needs to be met after an amount of time has passed. As a result, contracts typically have barrier periods of months or years. This allows plenty of time for a trend to take hold.
A commodore option over 1 hour is risky due to the volatility of most markets, such as cryptocurrencies and web3. It is much harder to predict the price movement or even keep it in the same direction over smaller periods.
If you are interested in long-term trading, of perhaps a year, commodore options could suit your needs. Each barrier typically has an expiration time of up to 365 days, with further barriers making a chain of multiple years. This allows traders to benefit from long-term price movements by using charts and indicators on sites like TradingView.
Another reason to trade commodore options is that they can reduce risk. They allow a trader to earn set multiples of returns at a fixed risk for each. Moreover, all barriers in the group do not have to be hit to see returns.
How To Start Trading Commodore Options
If you want to start trading commodore options, follow our step-by-step guide:
- Choose a broker: There is a lot to consider when you select an online broker. For instance, you need to check that they offer markets and assets that you wish to trade, such as Zoom Inc stock. Also, check whether they offer after-hours trading. Other things to consider are whether the broker offers a mobile app, a demo account or a simulator and whether they have a phone number to call for support. Finally, what are average returns and payouts on options contracts versus competitors?
- Conduct your research: When you have chosen a broker, you can start to research the markets they offer and look for opportunities. You can use charts and indicators to create signals of potential investments. It is also worth considering at this point whether you wish to trade with margin/leverage.
- Set barriers: If you have found what you consider a good opportunity, you can start to set the barriers for your commodore option. Depending on the length of time and target percentage, the broker will offer coupons of differing values. The more risk, the higher the coupon offered.
- Open and monitor: Purchase your commodore option and wait for each barrier to be hit. Remember, the barriers typically have an expiration time of up to a year, so these trades can be a slow burner.
Final Word On Trading Commodore Options
The prospect of commodore options trading offers an interesting spin on the classic options contract. The trader sets barriers of different levels for an underlying asset to hit and for each price point met within the expiration time, the trader will receive a coupon for a certain percentage. Since this type of option typically features expiration times of up to one year, it is suitable for those preferring a long-term strategy. It can limit risk, but it is important to remember that profits are also limited.
FAQs
What Is A Good Asset For Commodore Options?
Commodore options trading is suitable for almost any asset. However, since it requires a series of barriers to be hit, it is arguably most suited to indices of similar assets which experience steady growth.
What Is A Typical Expiration Time For Commodore Options?
You will need to exercise patience. Commodore options trading is typically a long-term endeavour. The expiration time for barriers is usually between a few months and a year, with multiple barriers being set. This means that some commodore options can have a total expiration time of several years.
Are There Resources To Learn More About Trading Commodore Options?
There are online resources available explaining more about commodore options trading. You can visit a YouTube channel with a video on the contracts or go on sites like Reddit and Discord to answer further questions. Fund screeners and PDF manuals can also prove useful.
Where Can I Start Trading Commodore Options?
We have listed the top brokers for trading commodore options in the UK, USA and elsewhere. Some of these trade on the MetaTrader 4 (MT4) and NjnjaTrader 8 platforms, though the number is limited. Note, it is not possible to login and trade commodore options on KuCoin, Robinhood, Webull, Thinkorswim, Zerodha, Trade Zero or TD Ameritrade. Fidelity also does not offer the financial product though a selection of ETFs are available.
Does Excel Allow Commodore Options Trading?
It is possible to improve your commodore options trading through formulas in Excel on Windows 7, 10 and above (or Pages for Mac). Through research and good, old-fashioned mathematics, traders can model market volume, price and potential value, and build a profit calculator. This data can then be transformed into a chart for easy viewing.