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

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Contents

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

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

Example: Long Rice Futures Trade

You decide to go long one near-month CBOT Rough Rice Futures contract at the price of USD 13.71 per hundredweight. Since each CBOT Rough Rice Futures contract represents 2000 hundredweights of rice, the value of the futures contract is USD 27,420. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 2,430 to open the long futures position.

Assuming that a week later, the price of rice rises and correspondingly, the price of rice futures jumps to USD 15.08 per hundredweight. Each contract is now worth USD 30,162. So by selling your futures contract now, you can exit your long position in rice futures with a profit of USD 2,742.

Long Rice Futures Strategy: Buy LOW, Sell HIGH
BUY 2000 hundredweights of rice at USD 13.71/cwt USD 27,420
SELL 2000 hundredweights of rice at USD 15.08/cwt USD 30,162
Profit USD 2,742
Investment (Initial Margin) USD 2,430
Return on Investment 112.84%

Margin Requirements & Leverage

In the examples shown above, although rice prices have moved by only 10%, the ROI generated is 112.84%. This leverage is made possible by the relatively low margin (approximately 8.86%) required to control a large amount of rice 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 Rice 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. ]

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  • Binarium
    Binarium

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

  • Binomo
    Binomo

    Trustful Broker. Recommended Only For Experienced Traders!

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 Soybeans Put Options to Profit from a Fall in Soybeans Prices

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

Example: Long Soybeans Put Option

You observed that the near-month CBOT Soybeans futures contract is trading at the price of USD 9.6900 per bushel. A CBOT Soybeans put option with the same expiration month and a nearby strike price of USD 9.7000 is being priced at USD 0.6500/bu. Since each underlying CBOT Soybeans futures contract represents 5,000 bushels of soybeans, the premium you need to pay to own the put option is USD 3,250.

Assuming that by option expiration day, the price of the underlying soybeans futures has fallen by 15% and is now trading at USD 8.2360 per bushel. 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 soybeans futures at the strike price of USD 9.7000. In other words, it also means that you get to sell 5,000 bushels of soybeans at USD 9.7000/bu on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying soybeans futures at the market price of USD 8.2365 per bushel, resulting in a gain of USD 1.4640/bu. Since each CBOT Soybeans put option covers 5,000 bushels of soybeans, gain from the long put position is USD 7,320. Deducting the initial premium of USD 3,250 you paid to purchase the put option, your net profit from the long put strategy will come to USD 4,070.

Long Soybeans Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (USD 9.7000/bu – USD 8.2360/bu) x 5000 bu
= USD 7,320
Investment = Initial Premium Paid
= USD 3,250
Net Profit = Gain from Option Exercise – Investment
= USD 7,320 – USD 3,250
= USD 4,070
Return on Investment = 125%

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

Learn More About Soybeans 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. ]

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

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

Example: Short Rice Futures Trade

You decide to go short one near-month CBOT Rough Rice Futures contract at the price of USD 13.71/cwt. Since each Rough Rice futures contract represents 2000 hundredweights of rice, the value of the contract is USD 27,420. To enter the short futures position, you have to put up an initial margin of USD 2,430.

A week later, the price of rice falls and correspondingly, the price of CBOT Rough Rice futures drops to USD 12.34 per hundredweight. Each contract is now worth only USD 24,678. So by closing out your futures position now, you can exit your short position in Rough Rice Futures with a profit of USD 2,742.

Short Rice Futures Strategy: Sell HIGH, Buy LOW
SELL 2000 hundredweights of rice at USD 13.71/cwt USD 27,420
BUY 2000 hundredweights of rice at USD 12.34/cwt USD 24,678
Profit USD 2,742
Investment (Initial Margin) USD 2,430
Return on Investment 112.84%

Margin Requirements & Leverage

In the examples shown above, although rice prices have moved by only 10%, the ROI generated is 0.00%. This leverage is made possible by the relatively low margin (approximately 8.86%) required to control a large amount of rice 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 Rice 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. ]

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

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

  • Binomo
    Binomo

    Trustful Broker. Recommended Only For Experienced Traders!

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