Buying Corn Call Options to Profit from a Rise in Corn Prices

If you are bullish on corn, you can profit from a rise in corn price by buying (going long) corn call options.

Example: Long Corn Call 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 call 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 call option is EUR 431.00.

Assuming that by option expiration day, the price of the underlying corn futures has risen by 15% and is now trading at EUR 148.60 per tonne. At this price, your call option is now in the money.

Gain from Call Option Exercise

By exercising your call option now, you get to assume a long position in the underlying corn futures at the strike price of EUR 130.00. This means that you get to buy the underlying corn at only EUR 130.00/ton on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying corn futures at the market price of EUR 148.64 per tonne, resulting in a gain of EUR 18.60/ton. Since each Euronext Corn call option covers 50 tonnes of corn, gain from the long call position is EUR 930.00. Deducting the initial premium of EUR 431.00 you paid to buy the call option, your net profit from the long call strategy will come to EUR 499.00.

Long Corn Call Option Strategy
Gain from Option Exercise=(Market Price of Underlying Futures - Option Strike Price) x Contract Size
=(EUR 148.60/ton - EUR 130.00/ton) x 50 ton
=EUR 930.00
Investment=Initial Premium Paid
=EUR 431.00
Net Profit=Gain from Option Exercise - Investment
=EUR 930.00 - EUR 431.00
=EUR 499.00
Return on Investment=116%

Sell-to-Close Call Option

In practice, there is often no need to exercise the call option to realise the profit. You can close out the position by selling the call 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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