Buying Platinum Call Options to Profit from a Rise in Platinum Prices
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If you are bullish on platinum, you can profit from a rise in platinum price by buying (going long) platinum call options.
Example: Long Platinum Call Option
You observed that the near-month NYMEX Platinum futures contract is trading at the price of USD 964.00 per troy ounce. A NYMEX Platinum call option with the same expiration month and a nearby strike price of USD 960.00 is being priced at USD 64.27/oz. Since each underlying NYMEX Platinum futures contract represents 50 troy ounces of platinum, the premium you need to pay to own the call option is USD 3,214.
Assuming that by option expiration day, the price of the underlying platinum futures has risen by 15% and is now trading at USD 1,109 per troy ounce. 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 platinum futures at the strike price of USD 960.00. This means that you get to buy the underlying platinum at only USD 960.00/oz on delivery day.
To take profit, you enter an offsetting short futures position in one contract of the underlying platinum futures at the market price of USD 1,109 per troy ounce, resulting in a gain of USD 149.00/oz. Since each NYMEX Platinum call option covers 50 troy ounces of platinum, gain from the long call position is USD 7,450. Deducting the initial premium of USD 3,214 you paid to buy the call option, your net profit from the long call strategy will come to USD 4,237.
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|Long Platinum Call Option Strategy|
|Gain from Option Exercise||=||(Market Price of Underlying Futures - Option Strike Price) x Contract Size|
|=||(USD 1,109/oz - USD 960.00/oz) x 50 oz|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Gain from Option Exercise - Investment|
|=||USD 7,450 - USD 3,214|
|Return on Investment||=||132%|
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 platinum option sale will be equal to it's intrinsic value.
Learn More About Platinum Futures & Options Trading
- Platinum Futures Basics
- Buying Platinum Futures to Profit from a Rise in Platinum Prices
- Selling Platinum Futures to Profit from a Fall in Platinum Prices
- Platinum Options Basics
- Platinum Put Option Trading Basics
- Hedging Against Rising Platinum Prices with Platinum Futures
- Hedging Against Falling Platinum Prices with Platinum Futures