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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 Name | Underlying Contract Size | Exercise Style | Option Price Quotes |
| CBOT Rice Options | 2000 cwt (Full Contract Specs) | American | N.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.
Related Articles
- Rice Futures Basics
- Buying Rice Futures to Profit from a Rise in Rice Prices
- Selling Rice Futures to Profit from a Fall in Rice Prices
- Rice Call Option Trading Basics
- Rice Put Option Trading Basics
- Hedging Against Rising Rice Prices with Rice Futures
- Hedging Against Falling Rice Prices with Rice Futures
How to Start Trading Rice Options
To buy or sell rice options, you need to open a trading account with a broker that handles futures options trades. Most online options brokerages out there only deal with stock options and only a few such as optionsXpress lets you trade BOTH stock and futures options. optionsXpress also provide a virtual trading platform where beginners can try out futures and options trading in real market conditions without using real money.
