Buying Cocoa Call Options to Profit from a Rise in Cocoa Prices

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
    BINOMO

    2nd place in the ranking!

Contents

Buying Cocoa Call Options to Profit from a Rise in Cocoa Prices

If you are bullish on cocoa, you can profit from a rise in cocoa price by buying (going long) cocoa call options.

Example: Long Cocoa Call Option

You observed that the near-month Euronext Cocoa futures contract is trading at the price of GBP 1,812 per tonne. A Euronext Cocoa call option with the same expiration month and a nearby strike price of GBP 1,800 is being priced at GBP 120.80/ton. Since each underlying Euronext Cocoa futures contract represents 10 tonnes of cocoa, the premium you need to pay to own the call option is GBP 1,208.

Assuming that by option expiration day, the price of the underlying cocoa futures has risen by 15% and is now trading at GBP 2,084 per tonne. At this price, your call option is now in the money.

Gain from Call Option Exercise

By exercising your call option now, you get to assume a long position in the underlying cocoa futures at the strike price of GBP 1,800. This means that you get to buy the underlying cocoa at only GBP 1,800/ton on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying cocoa futures at the market price of GBP 2,084 per tonne, resulting in a gain of GBP 284.00/ton. Since each Euronext Cocoa call option covers 10 tonnes of cocoa, gain from the long call position is GBP 2,840. Deducting the initial premium of GBP 1,208 you paid to buy the call option, your net profit from the long call strategy will come to GBP 1,632.

Long Cocoa Call Option Strategy
Gain from Option Exercise = (Market Price of Underlying Futures – Option Strike Price) x Contract Size
= (GBP 2,084/ton – GBP 1,800/ton) x 10 ton
= GBP 2,840
Investment = Initial Premium Paid
= GBP 1,208
Net Profit = Gain from Option Exercise – Investment
= GBP 2,840 – GBP 1,208
= GBP 1,632
Return on Investment = 135%

Sell-to-Close Call Option

In practice, there is often no need to exercise the call option to realise the profit. You can close out the position by selling the call option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the cocoa option sale will be equal to it’s intrinsic value.

Learn More About Cocoa Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
    BINOMO

    2nd place in the ranking!

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying (Going Long) Cocoa Futures to Profit from a Rise in Cocoa Prices

If you are bullish on cocoa, you can profit from a rise in cocoa price by taking up a long position in the cocoa futures market. You can do so by buying (going long) one or more cocoa futures contracts at a futures exchange.

Example: Long Cocoa Futures Trade

You decide to go long one near-month Euronext Cocoa Futures contract at the price of GBP 1,812 per tonne. Since each Euronext Cocoa Futures contract represents 10 tonnes of cocoa, the value of the futures contract is GBP 18,120. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of GBP 1,350 to open the long futures position.

Assuming that a week later, the price of cocoa rises and correspondingly, the price of cocoa futures jumps to GBP 1,993 per tonne. Each contract is now worth GBP 19,932. So by selling your futures contract now, you can exit your long position in cocoa futures with a profit of GBP 1,812.

Long Cocoa Futures Strategy: Buy LOW, Sell HIGH
BUY 10 tonnes of cocoa at GBP 1,812/ton GBP 18,120
SELL 10 tonnes of cocoa at GBP 1,993/ton GBP 19,932
Profit GBP 1,812
Investment (Initial Margin) GBP 1,350
Return on Investment 134%

Margin Requirements & Leverage

In the examples shown above, although cocoa prices have moved by only 10%, the ROI generated is 134%. This leverage is made possible by the relatively low margin (approximately 7%) required to control a large amount of cocoa represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

Learn More About Cocoa Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

How to Invest in Cocoa

Cocoa is a commodity and as such it is traded in the commodity futures market. There are actually two ways to invest in cocoa, namely cocoa futures contracts and cocoa options. There are pros and cons to each method of investment, but overall it is relatively simple to invest in cocoa.

Open a futures trading account. There are various brokers that specialize in futures and some that even allow you to trade stocks and futures. Some things to compare when evaluating brokers include commission costs, trading software and customer support services.

Deposit margin. Initial margin is the amount of money you need in your account to trade a particular futures contract and maintenance margin is the amount you must have to continue holding a position. The New York Mercantile Exchange (NYMEX) currently requires initial and maintenance margins of $3,300 and $3,000 respectively to trade one cocoa futures contract.

While the exchange sets the absolute minimums, your broker may have higher minimum margin requirements for clients. Also, bear in mind that there may be lower account requirements for trading cocoa options. Investors who want to invest in cocoa without risking too much money up front may want to start by investing in cocoa options.

Buy cocoa futures or call options. Each futures contract represents 10 tons of cocoa and the minimum price fluctuation or tick size is $1/ton or $10. This means that you gain $10 for every tick in your favor and lose $10 for every tick against your position. Profits and losses are credited or debited to all trading accounts at the end of each trading day.

Options work differently than futures contracts. With options, you pay a certain amount of money (referred to as the premium) to buy an option. The premium is the most you can lose on the trade. However, if the market moves in your favor, your option gains in value. At this point you can exercise the option and enter the cocoa futures market or simply sell the option for a profit.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
    BINOMO

    2nd place in the ranking!

Like this post? Please share to your friends:
All About Binary Options Trading
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: