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

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

Example: Long Rice Call Option

You observed that the near-month CBOT Rough Rice futures contract is trading at the price of USD 13.71 per hundredweight. A CBOT Rice call option with the same expiration month and a nearby strike price of USD 14.00 is being priced at USD 0.9100/cwt. Since each underlying CBOT Rough Rice futures contract represents 2000 hundredweights of rice, the premium you need to pay to own the call option is USD 1,820.

Assuming that by option expiration day, the price of the underlying rice futures has risen by 15% and is now trading at USD 15.77 per hundredweight. 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 rice futures at the strike price of USD 14.00. This means that you get to buy the underlying rice at only USD 14.00/cwt on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying rice futures at the market price of USD 15.77 per hundredweight, resulting in a gain of USD 1.7700/cwt. Since each CBOT Rough Rice call option covers 2000 hundredweights of rice, gain from the long call position is USD 3,540. Deducting the initial premium of USD 1,820 you paid to buy the call option, your net profit from the long call strategy will come to USD 1,720.

Long Rice Call Option Strategy
Gain from Option Exercise=(Market Price of Underlying Futures - Option Strike Price) x Contract Size
=(USD 15.77/cwt - USD 14.00/cwt) x 2000 cwt
=USD 3,540
 
Investment=Initial Premium Paid
=USD 1,820
 
Net Profit=Gain from Option Exercise - Investment
=USD 3,540 - USD 1,820
=USD 1,720
 
Return on Investment=95%

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

Learn More About Rice Futures & Options Trading

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