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Cocoa Options Explained
Cocoa options are option contracts in which the underlying asset is a cocoa futures contract.
The holder of a cocoa 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 cocoa futures at the strike price.
This right will cease to exist when the option expire after market close on expiration date.
Cocoa Option Exchanges
Cocoa option contracts are available for trading at NYSE Euronext (Euronext).
Euronext Cocoa option prices are quoted in pounds per metric ton and their underlying futures are traded in lots of 10 tonnes of cocoa.
| Exchange & Product Name | Underlying Contract Size | Exercise Style | Option Price Quotes |
| Euronext Cocoa Options | 10 ton (Full Contract Specs) | American | Calls | Puts |
Call and Put Options
Options are divided into two classes - calls and puts. Cocoa call options are purchased by traders who are bullish about cocoa prices. Traders who believe that cocoa prices will fall can buy cocoa 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.
Cocoa Options vs. Cocoa Futures
Compared to the outright purchase of the underlying cocoa futures, cocoa 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 Leverage
Compared to taking a position on the underlying cocoa futures outright, the buyer of a cocoa option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying cocoa futures.Limit Potential Losses
As cocoa options only grant the right but not the obligation to assume the underlying cocoa 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 cocoa 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.
Related Articles
- Cocoa Futures Basics
- Buying Cocoa Futures to Profit from a Rise in Cocoa Prices
- Selling Cocoa Futures to Profit from a Fall in Cocoa Prices
- Cocoa Call Option Trading Basics
- Cocoa Put Option Trading Basics
- Hedging Against Rising Cocoa Prices with Cocoa Futures
- Hedging Against Falling Cocoa Prices with Cocoa Futures
