If you are bearish on platinum, you can profit from a fall in platinum price by buying (going long) platinum put options.
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 put 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 put option is USD 3,214.
Assuming that by option expiration day, the price of the underlying platinum futures has fallen by 15% and is now trading at USD 819.40 per troy ounce. 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 platinum futures at the strike price of USD 960.00. In other words, it also means that you get to sell 50 troy ounces of platinum at USD 960.00/oz on delivery day.
To take profit, you enter an offsetting long futures position in one contract of the underlying platinum futures at the market price of USD 819.40 per troy ounce, resulting in a gain of USD 140.60/oz. Since each NYMEX Platinum put option covers 50 troy ounces of platinum, gain from the long put position is USD 7,030. Deducting the initial premium of USD 3,214 you paid to purchase the put option, your net profit from the long put strategy will come to USD 3,817.
|Long Platinum Put Option Strategy|
|Gain from Option Exercise||=||(Option Strike Price - Market Price of Underlying Futures) x Contract Size|
|=||(USD 960.00/oz - USD 819.40/oz) x 50 oz|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Gain from Option Exercise - Investment|
|=||USD 7,030 - USD 3,214|
|Return on Investment||=||119%|
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 platinum option sale will be equal to it's intrinsic value.
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