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Sugar Options Explained
Sugar options are option contracts in which the underlying asset is a sugar futures contract.
The holder of a sugar 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 sugar futures at the strike price.
This right will cease to exist when the option expire after market close on expiration date.
Sugar Option Exchanges
Sugar option contracts are available for trading at NYSE Euronext (Euronext) and Tokyo Grain Exchange (TGE).
Euronext White Sugar option prices are quoted in dollars and cents per metric ton and their underlying futures are traded in lots of 50 tonnes of sugar.
Euronext Raw Sugar options are traded in contract sizes of 112000 pounds (50 long tons) and their prices are quoted in dollars and cents per pound.
TGE Raw Sugar option prices are quoted in yen per metric ton and their underlying futures are traded in lots of 50 tonnes of sugar.
| Exchange & Product Name | Underlying Contract Size | Exercise Style | Option Price Quotes |
| Euronext White Sugar Options | 50 ton (Full Contract Specs) | American | Calls | Puts |
| Euronext Raw Sugar Options | 112000 lb (Full Contract Specs) | American | Calls | Puts |
| TGE Raw Sugar Options | 50 ton (Full Contract Specs) | American | N.A. |
Call and Put Options
Options are divided into two classes - calls and puts. Sugar call options are purchased by traders who are bullish about sugar prices. Traders who believe that sugar prices will fall can buy sugar 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.
Sugar Options vs. Sugar Futures
Compared to the outright purchase of the underlying sugar futures, sugar 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 sugar futures outright, the buyer of a sugar option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying sugar futures.Limit Potential Losses
As sugar options only grant the right but not the obligation to assume the underlying sugar 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 sugar 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
- Sugar Futures Basics
- Buying Sugar Futures to Profit from a Rise in Sugar Prices
- Selling Sugar Futures to Profit from a Fall in Sugar Prices
- Sugar Call Option Trading Basics
- Sugar Put Option Trading Basics
- Hedging Against Rising Sugar Prices with Sugar Futures
- Hedging Against Falling Sugar Prices with Sugar Futures
