If you are bearish on gasoline, you can profit from a fall in gasoline price by buying (going long) gasoline put 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 put 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 42,000 gallons of gasoline, the premium you need to pay to own the put option is USD 3,360.
Assuming that by option expiration day, the price of the underlying gasoline futures has fallen by 15% and is now trading at USD 0.9690 per gallon. At this price, your put option is now in the money.
By exercising your put option now, you get to assume a short position in the underlying gasoline futures at the strike price of USD 1.1000. In other words, it also means that you get to sell 42,000 gallons of gasoline at USD 1.1000/gal on delivery day.
To take profit, you enter an offsetting long futures position in one contract of the underlying gasoline futures at the market price of USD 0.9690 per gallon, resulting in a gain of USD 0.1310/gal. Since each NYMEX Gasoline put option covers 42,000 gallons of gasoline, gain from the long put position is USD 5,502. Deducting the initial premium of USD 3,360 you paid to purchase the put option, your net profit from the long put strategy will come to USD 2,142.
|Long Gasoline Put Option Strategy|
|Gain from Option Exercise||=||(Option Strike Price - Market Price of Underlying Futures) x Contract Size|
|=||(USD 1.1000/gal - USD 0.9690/gal) x 42000 gal|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Gain from Option Exercise - Investment|
|=||USD 5,502 - USD 3,360|
|Return on Investment||=||64%|
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 gasoline option sale will be equal to it's intrinsic value.
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