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

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

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

Example: Long Sugar Call Option

You observed that the near-month Euronext White Sugar (No. 407) futures contract is trading at the price of USD 324.60 per tonne. A Euronext Sugar call option with the same expiration month and a nearby strike price of USD 320.00 is being priced at USD 21.64/ton. Since each underlying Euronext White Sugar (No. 407) futures contract represents 50 tonnes of sugar, the premium you need to pay to own the call option is USD 1,082.

Assuming that by option expiration day, the price of the underlying sugar futures has risen by 15% and is now trading at USD 373.30 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 sugar futures at the strike price of USD 320.00. This means that you get to buy the underlying sugar at only USD 320.00/ton on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying sugar futures at the market price of USD 373.29 per tonne, resulting in a gain of USD 53.30/ton. Since each Euronext White Sugar (No. 407) call option covers 50 tonnes of sugar, gain from the long call position is USD 2,665. Deducting the initial premium of USD 1,082 you paid to buy the call option, your net profit from the long call strategy will come to USD 1,583.

Long Sugar Call Option Strategy
Gain from Option Exercise = (Market Price of Underlying Futures – Option Strike Price) x Contract Size
= (USD 373.30/ton – USD 320.00/ton) x 50 ton
= USD 2,665
Investment = Initial Premium Paid
= USD 1,082
Net Profit = Gain from Option Exercise – Investment
= USD 2,665 – USD 1,082
= USD 1,583
Return on Investment = 146%

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 sugar option sale will be equal to it’s intrinsic value.

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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. ]

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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) Sugar Futures to Profit from a Rise in Sugar Prices

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

Example: Long Sugar Futures Trade

You decide to go long one near-month Euronext Raw Sugar (No. 408) Futures contract at the price of USD 0.1111 per pound. Since each Euronext Raw Sugar (No. 408) Futures contract represents 112000 pounds of sugar, the value of the futures contract is USD 12,443. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 1,456 to open the long futures position.

Assuming that a week later, the price of sugar rises and correspondingly, the price of sugar futures jumps to USD 0.1222 per pound. Each contract is now worth USD 13,688. So by selling your futures contract now, you can exit your long position in sugar futures with a profit of USD 1,244.

Long Sugar Futures Strategy: Buy LOW, Sell HIGH
BUY 112000 pounds of sugar at USD 0.1111/lb USD 12,443
SELL 112000 pounds of sugar at USD 0.1222/lb USD 13,688
Profit USD 1,244
Investment (Initial Margin) USD 1,456
Return on Investment 85.4615%

Margin Requirements & Leverage

In the examples shown above, although sugar prices have moved by only 10%, the ROI generated is 85.4615%. This leverage is made possible by the relatively low margin (approximately 11.7012%) required to control a large amount of sugar 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 Sugar Futures & Options Trading

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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 Do I Invest in Sugar?

by Karen Rogers

Sweeten your investments by adding sugar to your portfolio.

At one time, sugar was a luxury only the rich could afford. The widespread cultivation of sugar cane and sugar beets changed that and made sugar affordable to everyone. Over 70 percent of the world’s supply comes from sugar cane, and sugar beet production makes up the remaining 30 percent. Brazil and Indonesia are the largest producers of sugar cane, while the European Union and Ukraine are the leading sugar beet producers. You can invest in this sweet commodity in numerous ways, depending on your risk tolerance.

Trade sugar commodity futures contracts if you want to invest in the physical commodity. Sugar is listed on the Inter Continental Exchange, or ICE, under the symbol “SB.” Sugar No. 11 is the benchmark for the world’s raw sugar trade and is known as “World Sugar.” One sugar contract controls 112,000 pounds, or 50 long tons, of sugar. Sugar’s price is quoted in U.S. currency. A move of 1/100 of a cent is worth $11.20 per contract.

Depositing an initial margin amount of $3,780 for each sugar contract you want to trade is required by all brokerage firms. The maintenance margin for each contract is $2,700. Sugar is a volatile commodity to trade and is known for experiencing unexpected price swings.

Trading sugar commodity futures options is a less risky way to take advantage of sugar’s price volatility. Each futures option controls one commodity futures contract. Call and put options give you the right, but not the obligation, to buy or sell the underlying futures contract at a set price before expiration. If you think the price of sugar will rise, you would buy a call option. If you think the price will fall, you would buy a put option. You don’t need to open a margin account to buy calls or puts. Your risk is limited to what you pay for the option.

Research some of the exchange-traded funds, or ETFs, that invest in the sugar industry. The Barclays iPath Dow Jones-UBS Sugar Total Return Sub-Index (NYSE: SGG) doesn’t hold the physical commodity. Instead, it tracks the price movements of the Dow Jones AIG Sugar Sub-Index. If you prefer investing in an ETF that trades sugar futures contracts, check out the iPath Pure Beta Sugar (NYSE: SGAR) and Teucrium Sugar Fund (NYSE: CANE). Both ETFs trade on the New York Stock Exchange and you can buy or sell shares through your online trading account.

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