Buying Cocoa Put Options to Profit from a Fall in Cocoa Prices

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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.

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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. ]

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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. ]

Selling (Going Short) Cocoa Futures to Profit from a Fall in Cocoa Prices

If you are bearish on cocoa, you can profit from a fall in cocoa price by taking up a short position in the cocoa futures market. You can do so by selling (shorting) one or more cocoa futures contracts at a futures exchange.

Example: Short Cocoa Futures Trade

You decide to go short one near-month Euronext Cocoa Futures contract at the price of GBP 1,812/ton. Since each Cocoa futures contract represents 10 tonnes of cocoa, the value of the contract is GBP 18,120. To enter the short futures position, you have to put up an initial margin of GBP 1,350.

A week later, the price of cocoa falls and correspondingly, the price of Euronext Cocoa futures drops to GBP 1,631 per tonne. Each contract is now worth only GBP 16,308. So by closing out your futures position now, you can exit your short position in Cocoa Futures with a profit of GBP 1,812.

Short Cocoa Futures Strategy: Sell HIGH, Buy LOW
SELL 10 tonnes of cocoa at GBP 1,812/ton GBP 18,120
BUY 10 tonnes of cocoa at GBP 1,631/ton GBP 16,308
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 0%. 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

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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. ]

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. ]

Cocoa Futures and Options Market Trading

*The information contained within this webpage comes from sources believed to be reliable. No guarantees are being made to the content’s accuracy or completeness.

The History of Cocoa and Cocoa Futures Trading

Cocoa is the common name for a powder derived from the fruit seeds of the cacao tree. Roughly 2/3 of cocoa bean production is used to make chocolate and 1/3 to make cocoa powder. Cocoa was originally combined with spices and served as a luxury drink in the Aztec empire. The cocoa was brought back to Spain and was called “the food of the gods”. For nearly a century, chocolate (usually made from cocoa, sugar, cinnamon and vanilla) became an exclusive drink of the Spanish Royal Court, until it gradually achieved a wider popularity in cocoa houses of major European cities when it became less expensive.

ICE Cocoa Futures and Options Quick Facts

10 metric ton contract size

$1 move equals $10

Trades March, May, July, Sept., Dec.

Cocoa futures symbol (CC)

Here is a brochure from the ICE for cocoa futures and options.

In 1925 the world’s first cocoa bean future was started at the New York Cocoa Exchange. In 1986 the first cocoa options began trading. Cocoa future trading is now a very active future trading contract. Cocoa options on the cocoa futures contracts have enjoyed much higher volume and consequently much greater liquidity recently.

During the September 11 terrorist attacks the Coffee, Sugar and Cocoa Exchange (CSCE) was destroyed but within days the cocoa futures and cocoa options markets were once again trading. This is a testament to the strength and viability of the soft futures markets. The CSCE has since merged to become part of the New York Board of Trade (NYBOT) who merged with The Intercontinental Exchange (ICE).

Are you a cocoa hedger? If so, click here to learn more.

Cocoa Options on Futures Contracts Explained

A cocoa call option gives the purchaser the right but not the obligation to purchase the underlying futures contract for a specific time period and a specific price (strike price). Let’s say that you wanted to purchase a July cocoa $2,000 call option and pay a premium of $1,200.

This means that you bought the right but not the obligation to buy 10 metric tons of July cocoa for $2,000 per ton. Of course, very few options are bought for the purpose of taking delivery but that is one potential outcome. Chances are that you either bought the cocoa option to hedge your price risk in the physical cocoa market (you may be a producer like a cocoa farmer or an end user like a chocolate candy company) or you are speculating that cocoa prices will go higher in an attempt to make a profit.

A cocoa put option gives the purchaser the right but not the obligation to sell the underlying futures contract for a specific time period and a specific price. Let’s say that you wanted to buy a July cocoa $1,500 put option and pay a premium of $1,100.

This means that you have the right but not the obligation to sell 10 metric tons of July cocoa at $1,500 per ton.

What is the delta factor?

The delta factor of an option represents the estimated percentage of change an option will receive based on the movements in the underlying futures contract.

Let’s assume the July cocoa $2,000 call option above has a 30% delta factor. This means that if the underlying futures contract were to rally by $1,000, then the call option would accrue by approximately $300 or 30% of $1,000 in the cocoa futures contract.

What is theta?

Options are wasting assets which means that they lose value as time passes. The theta of an option is the measure of time decay.

Let’s assume that you bought a July cocoa $2,000 call option with 60 days left until expiration. Let’s also assume that the cocoa futures prices have moved very little over the last month and are exactly the same price 30 days later. Your option will have lost 30 days worth of time and therefore will be worth less today that it was when it had 60 days left until expiration.

Vega is a measure of the implied volatility of an option contract as it relates to its underlying futures contract. For instance, if the underlying futures contract is extremely volatile then the implied volatility of the options of that futures contract will be affected.

In a high implied volatility environment option premiums tend to expand. Conversely, in a low implied volatility environment the option premiums tend to decrease.

*Contract information changes from time to time. Please click here to see the most recent contract specifications and click here for the most recent trading hours.

ICE Contract Specifications for Cocoa Future Contracts

10 metric tons (22,046 pounds)

4 :00 a.m. – 2 p.m. (NY time) (Verify with exchange)

Dollars per metric ton

March, May, July, September, December

Futures Ticker Symbol

**Click Here Now! for actual cocoa futures and options, quotes, prices, expirations, charts .

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