Buying Soybeans Put Options to Profit from a Fall in Soybeans Prices
If you are bearish on soybeans, you can profit from a fall in soybeans price by buying (going long) soybeans put options.
Example: Long Soybeans Put 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 put 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 5,000 bushels of soybeans, the premium you need to pay to own the put option is USD 3,250.
Assuming that by option expiration day, the price of the underlying soybeans futures has fallen by 15% and is now trading at USD 8.2360 per bushel. At this price, your put option is now in the money.
Gain from Put Option Exercise
By exercising your put option now, you get to assume a short position in the underlying soybeans futures at the strike price of USD 9.7000. In other words, it also means that you get to sell 5,000 bushels of soybeans at USD 9.7000/bu on delivery day.
To take profit, you enter an offsetting long futures position in one contract of the underlying soybeans futures at the market price of USD 8.2365 per bushel, resulting in a gain of USD 1.4640/bu. Since each CBOT Soybeans put option covers 5,000 bushels of soybeans, gain from the long put position is USD 7,320. Deducting the initial premium of USD 3,250 you paid to purchase the put option, your net profit from the long put strategy will come to USD 4,070.
| Long Soybeans Put Option Strategy | ||
| Gain from Option Exercise | = | (Option Strike Price - Market Price of Underlying Futures) x Contract Size |
| = | (USD 9.7000/bu - USD 8.2360/bu) x 5000 bu | |
| = | USD 7,320 | |
| Investment | = | Initial Premium Paid |
| = | USD 3,250 | |
| Net Profit | = | Gain from Option Exercise - Investment |
| = | USD 7,320 - USD 3,250 | |
| = | USD 4,070 | |
| Return on Investment | = | 125% |
Sell-to-Close Put Option
In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put 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.
Related Articles
- Soybeans Futures Basics
- Buying Soybeans Futures to Profit from a Rise in Soybeans Prices
- Selling Soybeans Futures to Profit from a Fall in Soybeans Prices
- Soybeans Options Basics
- Soybeans Call Option Trading Basics
- Hedging Against Rising Soybeans Prices with Soybeans Futures
- Hedging Against Falling Soybeans Prices with Soybeans Futures
