If you are bullish on gasoline, you can profit from a rise in gasoline price by buying (going long) gasoline call options.
You observed that the near-month NYMEX Gasoline futures contract is trading at the price of USD 1.1400 per gallon. A NYMEX Gasoline call option with the same expiration month and a nearby strike price of USD 1.1000 is being priced at USD 0.0800/gal. Since each underlying NYMEX Gasoline futures contract represents 42000 gallons of gasoline, the premium you need to pay to own the call option is USD 3,360.
Assuming that by option expiration day, the price of the underlying gasoline futures has risen by 15% and is now trading at USD 1.3110 per gallon. At this price, your call option is now in the money.
By exercising your call option now, you get to assume a long position in the underlying gasoline futures at the strike price of USD 1.1000. This means that you get to buy the underlying gasoline at only USD 1.1000/gal on delivery day.
To take profit, you enter an offsetting short futures position in one contract of the underlying gasoline futures at the market price of USD 1.3110 per gallon, resulting in a gain of USD 0.2110/gal. Since each NYMEX Gasoline call option covers 42000 gallons of gasoline, gain from the long call position is USD 8,862. Deducting the initial premium of USD 3,360 you paid to buy the call option, your net profit from the long call strategy will come to USD 5,502.
|Long Gasoline Call Option Strategy|
|Gain from Option Exercise||=||(Market Price of Underlying Futures - Option Strike Price) x Contract Size|
|=||(USD 1.3110/gal - USD 1.1000/gal) x 42000 gal|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Gain from Option Exercise - Investment|
|=||USD 8,862 - USD 3,360|
|Return on Investment||=||164%|
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 gasoline option sale will be equal to it's intrinsic value.
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