Rice Options Explained

Rice options are option contracts in which the underlying asset is a rice futures contract.

The holder of a rice option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying rice futures at the strike price.

This right will cease to exist when the option expire after market close on expiration date.

Rice Option Exchanges

Rice option contracts are available for trading at Chicago Board of Trade (CBOT).

CBOT Rice option prices are quoted in dollars and cents per bushel and their underlying futures are traded in lots of 2000 hundredweights (91 metric tons) of rice.

Exchange & Product NameUnderlying Contract SizeExercise StyleOption Price Quotes
CBOT Rice Options2000 cwt
(Full Contract Specs)
AmericanN.A.

Call and Put Options

Options are divided into two classes - calls and puts. Rice call options are purchased by traders who are bullish about rice prices. Traders who believe that rice prices will fall can buy rice put options instead.

Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Rice Options vs. Rice Futures

Compared to the outright purchase of the underlying rice futures, rice options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that has the potential to expire worthless.

Additional Leverage

Compared to taking a position on the underlying rice futures outright, the buyer of a rice option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying rice futures.

Limit Potential Losses

As rice options only grant the right but not the obligation to assume the underlying rice futures position, potential losses are limited to only the premium paid to purchase the option.

Flexibility

Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a rice option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

Learn More About Rice Futures & Options Trading

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