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Ethanol Options Explained
Ethanol options are option contracts in which the underlying asset is an ethanol futures contract. The holder of an ethanol 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 ethanol futures at the strike price. This right will cease to exist when the option expire after market close on expiration date.
Ethanol Option Exchanges
Ethanol option contracts are available for trading at Chicago Mercantile Exchange (CBOT).
CBOT Ethanol option prices are quoted in dollars and cents per gallon and their underlying futures are traded in lots of 29000 gallons of ethanol.
| Exchange & Product Name | Underlying Contract Size | Exercise Style | Option Price Quotes |
| CBOT Ethanol Options | 29000 gal (Full Contract Specs) | American | N.A. |
Call and Put Options
Options are divided into two classes - calls and puts. Ethanol call options are purchased by traders who are bullish about ethanol prices. Traders who believe that ethanol prices will fall can buy ethanol 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.
Ethanol Options vs. Ethanol Futures
Compared to the outright purchase of the underlying ethanol futures, ethanol 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 ethanol futures outright, the buyer of an ethanol option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying ethanol futures.Limit Potential Losses
As ethanol options only grant the right but not the obligation to assume the underlying ethanol 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 ethanol 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
- Ethanol Futures Basics
- Buying Ethanol Futures to Profit from a Rise in Ethanol Prices
- Selling Ethanol Futures to Profit from a Fall in Ethanol Prices
- Ethanol Call Option Trading Basics
- Ethanol Put Option Trading Basics
- Hedging Against Rising Ethanol Prices with Ethanol Futures
- Hedging Against Falling Ethanol Prices with Ethanol Futures
How to Start Trading Ethanol Options
To buy or sell ethanol options, you need to open a trading account with a broker that handles futures options trades. Most online options brokerages out there only deal with stock options and only a few such as optionsXpress lets you trade BOTH stock and futures options. optionsXpress also provide a virtual trading platform where beginners can try out futures and options trading in real market conditions without using real money.
