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

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

Example: Long Corn Put 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 put 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 put option is EUR 431.00.

Assuming that by option expiration day, the price of the underlying corn futures has fallen by 15% and is now trading at EUR 109.90 per tonne. 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 corn futures at the strike price of EUR 130.00. In other words, it also means that you get to sell 50 tonnes of corn at EUR 130.00/ton on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying corn futures at the market price of EUR 109.86 per tonne, resulting in a gain of EUR 20.10/ton. Since each Euronext Corn put option covers 50 tonnes of corn, gain from the long put position is EUR 1,005. Deducting the initial premium of EUR 431.00 you paid to purchase the put option, your net profit from the long put strategy will come to EUR 574.00.

Long Corn Put Option Strategy
Gain from Option Exercise=(Option Strike Price - Market Price of Underlying Futures) x Contract Size
=(EUR 130.00/ton - EUR 109.90/ton) x 50 ton
=EUR 1,005
Investment=Initial Premium Paid
=EUR 431.00
Net Profit=Gain from Option Exercise - Investment
=EUR 1,005 - EUR 431.00
=EUR 574.00
Return on Investment=133%

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 corn option sale will be equal to it's intrinsic value.

Learn More About Corn Futures & Options Trading

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