In the very short term, no one knows what the price of a commodity future will do. Everyone knows what it has done in the past, of course, but market tacticians disagree on how much useful information- as far as predicting upcoming price action- is encoded in recent price patterns. Some observers, myself included, believe there is little or no information on future price direction to be found in historical prices. Others swear by technical analysis, to the extent of ignoring market fundamentals altogether.
Regardless of trading philosophy, few serious players would dispute that in the very short term at least the price of a freely traded entity like a commodity future will fluctuate in a virtually random manner, even as it is responding to supply and demand considerations such as weather forecasts, farmers production intentions, the whims of consumers and economic policymakers, and the occasional mass-hysterical phenomenon sometimes called “the madness of crowds.”
Commodity prices may change abruptly, as when instantaneous and substantial news must suddenly be absorbed into the marketplace. Jolts of this type arrive, by definition, in a random manner but create seemingly nonrandom commodity price patterns, especially when these patterns are viewed in retrospect on price charts and divorced from the news that gave rise to them in the first place. Regardless of how nonrandom a trading market may appear in retrospect, at each instant of time that it was open and trading freely a temporary baknce existed between the forces of supply and demand, as did a state of very temporary price equilibrium.
Since the price of an option is a function of the price action in its underlying instrument, be it a commodity future or a stock, the price of an option is a derivative variable rather than an independent variable. Some pundits will argue that price action in an option presages upcoming action in the underlying instrument. Whereas this may be true in the case of stock options, where a sudden huge increase in options volume might be the result of insider trading, it is certainly not true of commodity futures where inside information does not really exist. I intend to treat options as pure derivatives, which means that I am going to be much more interested in the variability of futures prices than in the variability of options prices.
The relationship of paramount interest to option strategists is the relationship between an option price and the variability of its underlying future isolated from all other variables. The variability of the option price itself is of secondary importance, for that is affected by factors other than the variability of the underlying future: The price of an option, for example, will vary with the time remaining to expiry and also with the differential between the current futures price and the strike price of the option. All these numbers are continuously changing, making interpretation of an option price profile over time a rather pointless exercise. Needless to say, option price charts of the high/low/close variety are rarely seen.