The volatility has increased substantially for many commodities and that is being reflected in the prices of commodity options for these markets. What does this mean for commodity option investors? It means that you will be paying an inflated price for most options and the market will likely have to make a larger move for you to make a profit.
The volatility premium on options is also called the time value of options. When markets are making larger daily moves, option sellers require a larger premium to compensate for their additional risk. Therefore, those who buy commodity options, especially out-of-the-money options, will need the markets to continue making large moves. The danger comes when you buy an option in a strongly trending market and the market stalls or reverses. The time value will erode quickly and you will be fighting a major uphill battle.
These inflated premiums have become noticeable lately in the call options of gold, silver, crude oil, sugar and cocoa. Buying these options often contains less risk than buying a futures contract, but realize you will often need the market to continue making big moves in order to profit.