If you are bullish on lead, you can profit from a rise in lead price by buying (going long) lead call options.
You observed that the near-month LME Lead futures contract is trading at the price of USD 1,145 per tonne. A LME Lead call option with the same expiration month and a nearby strike price of USD 1,100 is being priced at USD 76.33/ton. Since each underlying LME Lead futures contract represents 25 tonnes of lead, the premium you need to pay to own the call option is USD 1,908.
Assuming that by option expiration day, the price of the underlying lead futures has risen by 15% and is now trading at USD 1,317 per tonne. 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 lead futures at the strike price of USD 1,100. This means that you get to buy the underlying lead at only USD 1,100/ton on delivery day.
To take profit, you enter an offsetting short futures position in one contract of the underlying lead futures at the market price of USD 1,317 per tonne, resulting in a gain of USD 217.00/ton. Since each LME Lead call option covers 25 tonnes of lead, gain from the long call position is USD 5,425. Deducting the initial premium of USD 1,908 you paid to buy the call option, your net profit from the long call strategy will come to USD 3,517.
|Long Lead Call Option Strategy|
|Gain from Option Exercise||=||(Market Price of Underlying Futures - Option Strike Price) x Contract Size|
|=||(USD 1,317/ton - USD 1,100/ton) x 25 ton|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Gain from Option Exercise - Investment|
|=||USD 5,425 - USD 1,908|
|Return on Investment||=||184%|
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 lead option sale will be equal to it's intrinsic value.
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