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

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

Example: Long Soybeans Call Option

You observed that the near-month CBOT Soybeans futures contract is trading at the price of USD 9.6900 per bushel. A CBOT Soybeans call option with the same expiration month and a nearby strike price of USD 9.7000 is being priced at USD 0.6500/bu. Since each underlying CBOT Soybeans futures contract represents 5000 bushels of soybeans, the premium you need to pay to own the call option is USD 3,250.

Assuming that by option expiration day, the price of the underlying soybeans futures has risen by 15% and is now trading at USD 11.14 per bushel. 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 soybeans futures at the strike price of USD 9.7000. This means that you get to buy the underlying soybeans at only USD 9.7000/bu on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying soybeans futures at the market price of USD 11.14 per bushel, resulting in a gain of USD 1.4400/bu. Since each CBOT Soybeans call option covers 5000 bushels of soybeans, gain from the long call position is USD 7,200. Deducting the initial premium of USD 3,250 you paid to buy the call option, your net profit from the long call strategy will come to USD 3,950.

Long Soybeans Call Option Strategy
Gain from Option Exercise=(Market Price of Underlying Futures - Option Strike Price) x Contract Size
=(USD 11.14/bu - USD 9.7000/bu) x 5000 bu
=USD 7,200
Investment=Initial Premium Paid
=USD 3,250
Net Profit=Gain from Option Exercise - Investment
=USD 7,200 - USD 3,250
=USD 3,950
Return on Investment=122%

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

Learn More About Soybeans Futures & Options Trading

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