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

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

Example: Long Rapeseed Call Option

You observed that the near-month Euronext Rapeseed futures contract is trading at the price of EUR 292.50 per tonne. A Euronext Rapeseed call option with the same expiration month and a nearby strike price of EUR 290.00 is being priced at EUR 19.50/ton. Since each underlying Euronext Rapeseed futures contract represents 50 tonnes of rapeseed, the premium you need to pay to own the call option is EUR 975.00.

Assuming that by option expiration day, the price of the underlying rapeseed futures has risen by 15% and is now trading at EUR 336.40 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 rapeseed futures at the strike price of EUR 290.00. This means that you get to buy the underlying rapeseed at only EUR 290.00/ton on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying rapeseed futures at the market price of EUR 336.38 per tonne, resulting in a gain of EUR 46.40/ton. Since each Euronext Rapeseed call option covers 50 tonnes of rapeseed, gain from the long call position is EUR 2,320. Deducting the initial premium of EUR 975.00 you paid to buy the call option, your net profit from the long call strategy will come to EUR 1,345.

Long Rapeseed Call Option Strategy
Gain from Option Exercise=(Market Price of Underlying Futures - Option Strike Price) x Contract Size
=(EUR 336.40/ton - EUR 290.00/ton) x 50 ton
=EUR 2,320
Investment=Initial Premium Paid
=EUR 975.00
Net Profit=Gain from Option Exercise - Investment
=EUR 2,320 - EUR 975.00
=EUR 1,345
Return on Investment=138%

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

Learn More About Rapeseed Futures & Options Trading

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