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

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

Example: Long Sugar Call Option

You observed that the near-month Euronext White Sugar (No. 407) futures contract is trading at the price of USD 324.60 per tonne. A Euronext Sugar call option with the same expiration month and a nearby strike price of USD 320.00 is being priced at USD 21.64/ton. Since each underlying Euronext White Sugar (No. 407) futures contract represents 50 tonnes of sugar, the premium you need to pay to own the call option is USD 1,082.

Assuming that by option expiration day, the price of the underlying sugar futures has risen by 15% and is now trading at USD 373.30 per tonne. 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 sugar futures at the strike price of USD 320.00. This means that you get to buy the underlying sugar at only USD 320.00/ton on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying sugar futures at the market price of USD 373.29 per tonne, resulting in a gain of USD 53.30/ton. Since each Euronext White Sugar (No. 407) call option covers 50 tonnes of sugar, gain from the long call position is USD 2,665. Deducting the initial premium of USD 1,082 you paid to buy the call option, your net profit from the long call strategy will come to USD 1,583.

Long Sugar Call Option Strategy
Gain from Option Exercise=(Market Price of Underlying Futures - Option Strike Price) x Contract Size
=(USD 373.30/ton - USD 320.00/ton) x 50 ton
=USD 2,665
 
Investment=Initial Premium Paid
=USD 1,082
 
Net Profit=Gain from Option Exercise - Investment
=USD 2,665 - USD 1,082
=USD 1,583
 
Return on Investment=146%

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

Learn More About Sugar Futures & Options Trading

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