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

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

Example: Long Oats Call Option

You observed that the near-month CBOT Oats futures contract is trading at the price of USD 2.0900 per bushel. A CBOT Oats call option with the same expiration month and a nearby strike price of USD 2.1000 is being priced at USD 0.1400/bu. Since each underlying CBOT Oats futures contract represents 5000 bushels of oats, the premium you need to pay to own the call option is USD 700.00.

Assuming that by option expiration day, the price of the underlying oats futures has risen by 15% and is now trading at USD 2.4040 per bushel. 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 oats futures at the strike price of USD 2.1000. This means that you get to buy the underlying oats at only USD 2.1000/bu on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying oats futures at the market price of USD 2.4035 per bushel, resulting in a gain of USD 0.3040/bu. Since each CBOT Oats call option covers 5000 bushels of oats, gain from the long call position is USD 1,520. Deducting the initial premium of USD 700.00 you paid to buy the call option, your net profit from the long call strategy will come to USD 820.00.

Long Oats Call Option Strategy
Gain from Option Exercise=(Market Price of Underlying Futures - Option Strike Price) x Contract Size
=(USD 2.4040/bu - USD 2.1000/bu) x 5000 bu
=USD 1,520
Investment=Initial Premium Paid
=USD 700.00
Net Profit=Gain from Option Exercise - Investment
=USD 1,520 - USD 700.00
=USD 820.00
Return on Investment=117%

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

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