Rapeseed Options Explained

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Contents

Rapeseed Options Explained

Rapeseed options are option contracts in which the underlying asset is a rapeseed futures contract.

The holder of a rapeseed option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying rapeseed futures at the strike price.

This right will cease to exist when the option expire after market close on expiration date.

Rapeseed Option Exchanges

Rapeseed option contracts are available for trading at NYSE Euronext (Euronext).

Euronext Rapeseed option prices are quoted in dollars and cents per metric ton and their underlying futures are traded in lots of 50 tonnes of rapeseed.

Exchange & Product Name Underlying Contract Size Exercise Style Option Price Quotes
Euronext Rapeseed Options 50 ton
(Full Contract Specs)
American Calls | Puts

Call and Put Options

Options are divided into two classes – calls and puts. Rapeseed call options are purchased by traders who are bullish about rapeseed prices. Traders who believe that rapeseed prices will fall can buy rapeseed put options instead.

Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Rapeseed Options vs. Rapeseed Futures

Additional Leverage

Limit Potential Losses

As rapeseed options only grant the right but not the obligation to assume the underlying rapeseed futures position, potential losses are limited to only the premium paid to purchase the option.

Flexibility

Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a rapeseed option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

Learn More About Rapeseed Futures & Options Trading

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Writing Puts to Purchase Stocks

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Leverage using Calls, Not Margin Calls

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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. ]

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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

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Rapeseed Options Explained

Definition:
A put option is an option contract in which the holder (buyer) has the right (but not the obligation) to sell a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration).

For the writer (seller) of a put option, it represents an obligation to buy the underlying security at the strike price if the option is exercised. The put option writer is paid a premium for taking on the risk associated with the obligation.

For stock options, each contract covers 100 shares.

Buying Put Options

Put buying is the simplest way to trade put options. When the options trader is bearish on particular security, he can purchase put options to profit from a slide in asset price. The price of the asset must move significantly below the strike price of the put options before the option expiration date for this strategy to be profitable.

A Simplified Example

Suppose the stock of XYZ company is trading at $40. A put option contract with a strike price of $40 expiring in a month’s time is being priced at $2. You strongly believe that XYZ stock will drop sharply in the coming weeks after their earnings report. So you paid $200 to purchase a single $40 XYZ put option covering 100 shares.

Say you were spot on and the price of XYZ stock plunges to $30 after the company reported weak earnings and lowered its earnings guidance for the next quarter. With this crash in the underlying stock price, your put buying strategy will result in a profit of $800.

Let’s take a look at how we obtain this figure.

If you were to exercise your put option after earnings, you invoke your right to sell 100 shares of XYZ stock at $40 each. Although you don’t own any share of XYZ company at this time, you can easily go to the open market to buy 100 shares at only $30 a share and sell them immediately for $40 per share. This gives you a profit of $10 per share. Since each put option contract covers 100 shares, the total amount you will receive from the exercise is $1000. As you had paid $200 to purchase this put option, your net profit for the entire trade is $800.

This strategy of trading put option is known as the long put strategy. See our long put strategy article for a more detailed explanation as well as formulae for calculating maximum profit, maximum loss and breakeven points.

Protective Puts

Investors also buy put options when they wish to protect an existing long stock position. Put options employed in this manner are also known as protective puts. Entire portfolio of stocks can also be protected using index puts.

Selling Put Options

Instead of purchasing put options, one can also sell (write) them for a profit. Put option writers, also known as sellers, sell put options with the hope that they expire worthless so that they can pocket the premiums. Selling puts, or put writing, involves more risk but can be profitable if done properly.

Covered Puts

The written put option is covered if the put option writer is also short the obligated quantity of the underlying security. The covered put writing strategy is employed when the investor is bearish on the underlying.

Naked Puts

The short put is naked if the put option writer did not short the obligated quantity of the underlying security when the put option is sold. The naked put writing strategy is used when the investor is bullish on the underlying.

For the patient investor who is bullish on a particular company for the long haul, writing naked puts can also be a great strategy to acquire stocks at a discount.

Put Spreads

A put spread is an options strategy in which equal number of put option contracts are bought and sold simultaneously on the same underlying security but with different strike prices and/or expiration dates. Put spreads limit the option trader’s maximum loss at the expense of capping his potential profit at the same time.

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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. ]

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The Definitive Guide To Canola As A Commodity For Novice Investors

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Last Updated on May 16, 2020

Why is Canola Valuable?

Canola is a crop grown primarily for its seeds, which can be crushed to produce canola oil and canola meal.

In the 1960s, Canadian scientists created canola by conventionally breeding rapeseed plants. The idea was to eliminate the undesirable properties of rapeseed oil and create a new plant with a better nutritional profile. The term canola is a contraction of ‘Canadian’ and ‘ola.’

Canola oil is one of the most versatile cooking oils and a healthy alternative to oils with higher saturated fat content. Canola meal is a staple in animal feed. These two products make canola an important global commodity.

How is Canola Produced?

Canola is a member of the Brassica family of crops, which includes broccoli, cabbage, cauliflower, mustard, turnip and radish.

The ideal habitat for growing canola is a grain farm with rainfall zones of between 450 and 700 mm, although newer varieties of the crop have been grown in drier climates. The crop has a similar profile to wheat, and farmers often rotate wheat and canola on their acreage.

Canola crops can be planted in the spring or winter. Spring canola grows in colder norther climates such as the US plains states and Canada. The crop is planted in rows in March and harvested in September or October. The slightly cooler summers in the northern growing regions allow the crop to prosper. Winter canola is planted in September and October and harvested in the spring.

Canola is considered a hardy crop that adapts well to variations in temperatures. As a result, it is grown in a wide variety of geographical regions in the United States, Canada and other regions of the world.

Canadian farmers began planting canola in 1974, and US farmers introduced the crop in 1988. More than 80% of the canola in the United States is produced in the state of North Dakota. Other key producing states include Oklahoma, Montana, Washington, Minnesota, Kansa and Idaho.

Canada is the world’s largest single country producer of canola. It produces more than 25% of the global supply of canola and leads the world in exports. The European Union also produces a significant amount of canola.

Where is Canola From?

Top 5 Canola Producing Countries

Canada

China

India

Germany

France

Rank Country Annual Output (in metric tons)
#1 15,500,000
#2 14,700,000
#3 7,800,000
#4 6,250,000
#5 5,500,000

Canola production has risen sharply since the crop’s introduction. Growing demand for vegetable oils in India and China have contributed to this demand as has growing demand for canola in biofuels. The United States, China, Japan, Mexico and Pakistan are the largest consumers.

Top 3 Uses of Canola

Use Description
Canola Oil

Its favorable nutritional profile makes canola a popular choice for sauteing, frying and baking. Canola Meal

The canola meal that remains after oil extraction can be crushed and prepared as animal feed for poultry, pigs and cattle. Non-food Ingredient

Canola is used in the follow non-food products: Canola is used in the following non-food products: Biodiesel, Printing inks, Cosmetics, Toothpaste and more.

Images via Wikipedia and Pixabay

What Drives the Price of Canola?

  1. Canadian Market
  2. The US Dollar
  3. Emerging Market Demand
  4. Substitution
  5. Biofuel Demand
  6. Health News

Canadian Market

Canada produces the largest share of the global supply of canola, so events in this country can have an important effect on prices.

Extremely cold or warm temperatures can limit crop production. Also, decisions about how to allocate acreage for crop production can impact prices. If farmers believe the price prospects for wheat, for example, are more favorable, then canola production might suffer. This could send prices higher.

The US Dollar

The US currency is the world’s reserve currency. As a result, canola and other commodities are quoted in US dollars. Canola growers receive fewer dollars for their crop when the US currency is strong and more dollars when the currency is weak.

Emerging Market Demand

Emerging market countries such as China, Mexico and Pakistan import significant amounts of canola oil, and consumption has been gradually growing over the years. As these and other emerging economies expand, their demand for agricultural commodities will grow. Increasing wealth will also likely mean increased consumption of meat. Since canola is used to produce livestock feed, this should also boost prices for the commodity.

On the other hand, a global recession or severe emerging market slowdown could limit demand.

Many emerging markets are large consumers of canola oil. Image via Wikipedia

Substitution

Oil produced from canola meal competes with many other oil meals including castor, soybean, linseed and cottonseed. The demand for these meals will fluctuate mostly based on price and availability.

Perception about health benefits could also impact the relative demand for different oils and oil meals.

Biofuel Demand

Surging demand for biofuels has contributed strongly to demand for canola.

The European Union has not been able to produce enough canola for its biodiesel needs and imports the crop from Russia and Ukraine. The two countries have ramped up production, but as more consumers turn to biofuels, supply may not be able to keep pace with demand.

Health News

Canola growers tout the many benefits of canola oil consumption including its low saturated fat and high omega fats profile. They call it the world’s healthiest cooking oil.

However, canola oil has its controversies. Some health experts warn that canola oil is really just modified rapeseed oil. Rapeseed oil has traditionally been used for industrial purposes such as in lubricants. It contains harmful substances such as erucic acid, which may cause heart damage.

In addition, around 90% of the global canola crop is genetically modified, and many scientists believe consuming genetically modified products can cause diseases.

As more information becomes known about the positive and negative health effects of canola, consumption patterns may change.

Reasons You Might Trade Canola

Traders purchase agricultural commodities such as canola for many reasons, but the best reasons to buy include:

  1. Inflation and Weak US Dollar Hedge
  2. Bet on Demand Growth

Inflation and Weak US Dollar Hedge

Trading canola is one way to bet on a weak US dollar and higher inflation. Since agricultural commodities including canola get priced in US dollars, the performance of the US currency plays a crucial role in their pricing.

The US Federal Reserve Bank has generally pursued accommodative policies that have kept the US dollar weak. If US central bankers continue these policies, then agricultural commodities could see significant gains. Consumers concerned about protecting their purchasing power should consider investing in agricultural commodities. A weak dollar could stoke inflation concerns and raise canola prices.

Speculate on Demand Growth

Canola prices should perform well if the world economy grows at a strong rate.

Demand from emerging market economies could be the catalysts for significantly higher agricultural commodity prices. As these countries become richer, they will probably increase their demand for livestock feed and oils. Canola prices should benefit from these trends.

Demand in the developed world may also outstrip supply in the coming years. Factors such as growth in biodiesels could contribute to this demand.

Should I Trade Canola?

Traders who want exposure to canola prices might want to consider buying a basket of commodities that includes other agricultural staples such as wheat, corn, barley and soybeans.

For additional diversification, they may want to trade in other commodities including metals and energy. Purchasing a basket of commodities helps protect traders from the volatility of any individual commodity. It also adds overall diversification to an investment portfolio.

Canola is arguably an attractive commodity to consider trading. There are four specific trends that could boost canola prices in the years ahead:

  1. Emerging market demand
  2. Climate change
  3. Biofuels
  4. Health issues

Emerging market demand

The development of emerging economies could boost canola demand. As people in these countries accumulate wealth, they will probably start eating a more varied diet. The demand for livestock feed and canola oil may see significant growth.

Climate change

Global warming trends have the potential to seriously disrupt the production of many different crops including canola. If recent weather patterns continue, the world’s supply of food may not be able to meet demand in the years ahead. Trading agricultural commodities is a way to benefit from this trend.

Climate change may disrupt the production of crops like canola. Image via Wikipedia

Biofuels

The growth in biofuel consumption could lead to significantly greater demand for canola. The European Union is unable to meet its demand and is turning to Eastern European countries for its supply.

Health Issues

Canola is seen by many medical experts as a heart-healthy alternative to other oils with higher saturated fat content. The American Heart Association has added a new liquid vegetable oil category to its Heart-Check Food Certification program, and canola oil is on the list. More positive press about the health benefits of canola could lead prices higher in the years ahead.

However there are some risks to trading canola that should be considered:

  1. A strong US dollar could drive prices lower.
  2. Overproduction by large suppliers and exporters such as Canada could depress prices.
  3. Bad news on the health front could weaken consumer demand for canola products.

What Do Investment Experts Think About Canola?

Experts see both potential risks and pitfalls from trading canola.

“We’re definitely optimistic on grains and oilseeds.”

James Cordier, president and head trader of OptionSellers.com

Jim Rogers discusses commodities on The Street. via YouTube

“I’m still extremely optimistic about agriculture, more so than many sectors of the world economy.”

Jim Rogers, creator of the Rogers International Commodity Index

However, Canadian officials present a more muted outlook for canola. Although the Canadian farm ministry cut its harvest forecast, the country still produces record amounts of canola crops. Improvements in crop strains are the primary reason for this abundance.

“Historically, the hybrid varieties grown across Western Canada proved to be remarkably drought tolerant.”

Canadian Farm Ministry

How to Trade Canola

Unfortunately there are a limited number of ways to trade canola:

Canola Trading Methods Compared

Method of Investing Storage Costs? Expiration Dates? Management Costs? Leverage? Regulated Exchange?
Soybeans Futures N Y N Y Y
Soybeans Options N Y N Y Y
Soybeans Shares N N N Y Y
Soybeans CFDs N N N Y Y

Canola Futures

The Intercontinental Exchange (ICE) offers a contract on canola that settles into 20 metric tons of the commodity.

The contract trades electronically and has expiration months of January, March, May, July and November.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions.

At expiration, the contracts are physically settled.

Trading futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Canola Options

The ICE offers an options contract on canola futures.

Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of canola futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in canola futures to profit from their trades.

Canola Company Shares

There are no pure-play public companies engaged exclusively in the production and sale of canola. However, these three diversified, publicly traded agribusinesses offer some exposure to the sector:

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