- Coffee Options Explained
- Coffee Option Exchanges
- Call and Put Options
- Coffee Futures Exchanges
- Coffee Options vs. Coffee Futures
- Additional Leverage
- Limit Potential Losses
- Time Decay
- Learn More About Coffee Futures & Options Trading
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- Continue Reading...
- Buying Straddles into Earnings
- Writing Puts to Purchase Stocks
- What are Binary Options and How to Trade Them?
- Investing in Growth Stocks using LEAPSÂ® options
- Effect of Dividends on Option Pricing
- Bull Call Spread: An Alternative to the Covered Call
- Coffee Futures and Options Trading
- Dividend Capture using Covered Calls
- Leverage using Calls, Not Margin Calls
- Day Trading using Options
- What is the Put Call Ratio and How to Use It
- Understanding Put-Call Parity
- Futures Measures
- Understanding the Greeks
- Valuing Common Stock using Discounted Cash Flow Analysis
Home / Futures Options
Coffee Options Explained
Coffee options are option contracts in which the underlying asset is a coffee futures contract.
The holder of a coffee 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 coffee futures at the strike price.
This right will cease to exist when the option expire after market close on expiration date.
Coffee Option Exchanges
Coffee option contracts are available for trading at NYSE Euronext (Euronext).
Euronext Coffee option prices are quoted in dollars per metric ton and their underlying futures are traded in lots of 10 tonnes of coffee.
Call and Put Options
Options are divided into two classes - calls and puts.
Coffee call options are purchased by traders who are bullish about coffee prices.
Coffee Futures Exchanges
Traders who believe that coffee prices will fall can buy coffee 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.
Coffee Options vs. Coffee FuturesCompared to the outright purchase of the underlying coffee futures, coffee options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that has the potential to expire worthless.
Additional LeverageCompared to taking a position on the underlying coffee futures outright, the buyer of a coffee option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying coffee futures.
Limit Potential Losses
As coffee options only grant the right but not the obligation to assume the underlying coffee futures position, potential losses are limited to only the premium paid to purchase the option.
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.
Options have a limited lifespan and are subjected to the effects of time decay.
The value of a coffee 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 Coffee Futures & Options Trading
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