If you are bullish on tin, you can profit from a rise in tin price by buying (going long) tin call options.
You observed that the near-month LME Tin futures contract is trading at the price of USD 11,550 per tonne. A LME Tin call option with the same expiration month and a nearby strike price of USD 12,000 is being priced at USD 770.00/ton. Since each underlying LME Tin futures contract represents 5 tonnes of tin, the premium you need to pay to own the call option is USD 3,850.
Assuming that by option expiration day, the price of the underlying tin futures has risen by 15% and is now trading at USD 13,280 per tonne. At this price, your call option is now in the money.
By exercising your call option now, you get to assume a long position in the underlying tin futures at the strike price of USD 12,000. This means that you get to buy the underlying tin at only USD 12,000/ton on delivery day.
To take profit, you enter an offsetting short futures position in one contract of the underlying tin futures at the market price of USD 13,283 per tonne, resulting in a gain of USD 1,280/ton. Since each LME Tin call option covers 5 tonnes of tin, gain from the long call position is USD 6,400. Deducting the initial premium of USD 3,850 you paid to buy the call option, your net profit from the long call strategy will come to USD 2,550.
|Long Tin Call Option Strategy|
|Gain from Option Exercise||=||(Market Price of Underlying Futures - Option Strike Price) x Contract Size|
|=||(USD 13,280/ton - USD 12,000/ton) x 5 ton|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Gain from Option Exercise - Investment|
|=||USD 6,400 - USD 3,850|
|Return on Investment||=||66%|
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 tin option sale will be equal to it's intrinsic value.
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