Buying Nickel Call Options to Profit from a Rise in Nickel Prices

If you are bullish on nickel, you can profit from a rise in nickel price by buying (going long) nickel call options.

Example: Long Nickel Call Option

You observed that the near-month LME Nickel futures contract is trading at the price of USD 10,100 per tonne. A LME Nickel call option with the same expiration month and a nearby strike price of USD 10,000 is being priced at USD 673.33/ton. Since each underlying LME Nickel futures contract represents 6 tonnes of nickel, the premium you need to pay to own the call option is USD 4,040.

Assuming that by option expiration day, the price of the underlying nickel futures has risen by 15% and is now trading at USD 11,620 per tonne. At this price, your call option is now in the money.

Gain from Call Option Exercise

By exercising your call option now, you get to assume a long position in the underlying nickel futures at the strike price of USD 10,000. This means that you get to buy the underlying nickel at only USD 10,000/ton on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying nickel futures at the market price of USD 11,615 per tonne, resulting in a gain of USD 1,620/ton. Since each LME Nickel call option covers 6 tonnes of nickel, gain from the long call position is USD 9,720. Deducting the initial premium of USD 4,040 you paid to buy the call option, your net profit from the long call strategy will come to USD 5,680.

Long Nickel Call Option Strategy
Gain from Option Exercise=(Market Price of Underlying Futures - Option Strike Price) x Contract Size
=(USD 11,620/ton - USD 10,000/ton) x 6 ton
=USD 9,720
Investment=Initial Premium Paid
=USD 4,040
Net Profit=Gain from Option Exercise - Investment
=USD 9,720 - USD 4,040
=USD 5,680
Return on Investment=141%

Sell-to-Close Call Option

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

Learn More About Nickel Futures & Options Trading

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