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

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Contents

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

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

Example: Long Corn Futures Trade

You decide to go long one near-month Euronext Corn Futures contract at the price of EUR 129.25 per tonne. Since each Euronext Corn Futures contract represents 50 tonnes of corn, the value of the futures contract is EUR 6,463. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of EUR 700.00 to open the long futures position.

Assuming that a week later, the price of corn rises and correspondingly, the price of corn futures jumps to EUR 142.18 per tonne. Each contract is now worth EUR 7,109. So by selling your futures contract now, you can exit your long position in corn futures with a profit of EUR 646.25.

Long Corn Futures Strategy: Buy LOW, Sell HIGH
BUY 50 tonnes of corn at EUR 129.25/ton EUR 6,463
SELL 50 tonnes of corn at EUR 142.18/ton EUR 7,109
Profit EUR 646.25
Investment (Initial Margin) EUR 700.00
Return on Investment 92%

Margin Requirements & Leverage

In the examples shown above, although corn prices have moved by only 10%, the ROI generated is 92%. This leverage is made possible by the relatively low margin (approximately 11%) required to control a large amount of corn 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.

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Buying Straddles into Earnings

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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. ]

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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 Corn Put Options to Profit from a Fall in Corn Prices

If you are bearish on corn, you can profit from a fall in corn price by buying (going long) corn put options.

Example: Long Corn Put Option

You observed that the near-month Euronext Corn futures contract is trading at the price of EUR 129.25 per tonne. A Euronext Corn put option with the same expiration month and a nearby strike price of EUR 130.00 is being priced at EUR 8.6200/ton. Since each underlying Euronext Corn futures contract represents 50 tonnes of corn, the premium you need to pay to own the put option is EUR 431.00.

Assuming that by option expiration day, the price of the underlying corn futures has fallen by 15% and is now trading at EUR 109.90 per tonne. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying corn futures at the strike price of EUR 130.00. In other words, it also means that you get to sell 50 tonnes of corn at EUR 130.00/ton on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying corn futures at the market price of EUR 109.86 per tonne, resulting in a gain of EUR 20.10/ton. Since each Euronext Corn put option covers 50 tonnes of corn, gain from the long put position is EUR 1,005. Deducting the initial premium of EUR 431.00 you paid to purchase the put option, your net profit from the long put strategy will come to EUR 574.00.

Long Corn Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (EUR 130.00/ton – EUR 109.90/ton) x 50 ton
= EUR 1,005
Investment = Initial Premium Paid
= EUR 431.00
Net Profit = Gain from Option Exercise – Investment
= EUR 1,005 – EUR 431.00
= EUR 574.00
Return on Investment = 133%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put 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 corn option sale will be equal to it’s intrinsic value.

Learn More About Corn 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. ]

Long Position (Long)

What Is Long Position (Long)?

A long position—also known as simply long—is the buying of a stock, commodity, or currency with the expectation that it will rise in value. Holding a long position is a bullish view. A long position is the opposite of a short position (short).

Long position and long are often used In the context of buying an options contract. The trader can hold either a long call or a long put option, depending on the outlook for the underlying asset of the option contract.

  • An investor who hopes to benefit from an upward price movement in an asset will “go long” on a call option. The call gives the holder the option to buy the underlying asset at a certain price.
  • Conversely, an investor who expects an asset’s price to fall will be long on a put option—and maintain the right to sell the asset at a certain price.

Long Position

The Many Faces of Long

Long is one of those investing terms that can have multiple meanings, depending on where it is used. The most common meaning of long is in the length of time an investment is held. However, the term long has a different meaning when used in options and futures contracts.

Key Takeaways

  • A long—long position—refers to the purchase of an asset with the expectation it will increase in value—a bullish attitude.
  • A long position in options contracts indicates the holder owns the underlying asset.
  • A long position is the opposite of a short position.
  • In options, being long can refer either to outright ownership of an asset or being the holder of an option on the asset.
  • Being long on a stock or bond investment is a measurement of time.

Long Holding Investment

Going long on a stock or bond is the more conventional investing practice in the capital markets. With a long-position investment, the investor purchases an asset and owns it with the expectation that the price is going to rise. This investor normally has no plan to sell the security in the near future. In reference to holding equities, which have an inherent bias to rise, long can refer to a measurement of time as well as bullish intent.

Going long on a stock or bond is the more conventional investing practice in the capital markets, especially for retail investors. An expectation that assets will appreciate in value in the long run—the buy and hold strategy—spares the investor the need for constant market-watching or market-timing, and allows time to weather the inevitable ups and downs. Plus, history is on one’s side, as the stock market inevitably appreciates, over time.

Of course, that doesn’t mean there can’t be sharp, portfolio-decimating drops along the way (the COVID-19 inspired fall in global equity markets that began in February 2020 is a prime example), which can be disastrous if one occurs right before an investor was planning to retire—or needed to liquidate holdings for some reason. A prolonged bear market can also be troublesome, as it often favors short-sellers and those betting on declines.

Finally, going long in the outright-ownership sense means a good amount of capital is tied up, which could result in missing out on other opportunities.

Long Position Options Contracts

In the world of options contracts, the term long has nothing to do with the measurement of time but instead speaks to the owning of an underlying asset. The long position holder is one who currently holds the underlying asset in their portfolio.

When a trader buys or holds a call options contract from an options writer they are long, due to the power they hold in being able to buy the asset. An investor who is long a call option is one who buys a call with the expectation that the underlying security will increase in value. The long position call holder believes the asset’s value is rising and may decide to exercise their option to buy it by the expiration date.

But not every trader who holds a long position believes the asset’s value will increase. The trader who owns the underlying asset in their portfolio and believes the value will fall can buy a put option contract. They still have a long position because they have the ability to sell the underlying asset they hold in their portfolio. The holder of a long put option believes the price of an asset will fall. They hold the option with the hope that they will be able to sell the underlying asset at an advantageous price by the expiry.

So, as you see, the long position on an options contract can express either a bullish or bearish sentiment depending on whether the long contract is a put or a call.

In contrast, the short position on an options contract does not own the stock or other underlying asset but borrows it with the expectation of selling it and then repurchasing it at a lower price.

Long Futures Contracts

Investors and businesses can also enter into a long forward or futures contract to hedge against adverse price movements. A company can employ a long hedge to lock in a purchase price for a commodity that is needed in the future. Futures differ from options in that the holder is obligated to buy or sell the underlying asset. They do not get to choose but must complete these actions.

Suppose a jewelry manufacturer believes the price of gold is poised to turn upwards in the short term. The firm can enter into a long futures contract with its gold supplier to purchase gold in three months from the supplier at $1,300. In three months, whether the price is above or below $1,300, the business that has a long position on gold futures is obligated to purchase the gold from the supplier at the agreed contract price of $1,300. The supplier, in turn, is obligated to deliver the physical commodity when the contract expires.

Speculators also go long on futures when they believe the prices will go up. They don’t necessarily want the physical commodity, as they are only interested in capitalizing on the price movement. Before expiry, a speculator holding a long futures contract can sell the contract in the market.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Top Binary Options Broker 2020!
    Best Choice For Beginners and Middle-Leveled Traders!
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    Free Trading Education!
    Big Sign-Up Bonus!

  • Binomo
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