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

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

Example: Long Wheat Call Option

You observed that the near-month Euronext Milling Wheat futures contract is trading at the price of EUR 146.50 per tonne. A Euronext Wheat call option with the same expiration month and a nearby strike price of EUR 150.00 is being priced at EUR 9.7700/ton. Since each underlying Euronext Milling Wheat futures contract represents 50 tonnes of wheat, the premium you need to pay to own the call option is EUR 488.50.

Assuming that by option expiration day, the price of the underlying wheat futures has risen by 15% and is now trading at EUR 168.50 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 wheat futures at the strike price of EUR 150.00. This means that you get to buy the underlying wheat at only EUR 150.00/ton on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying wheat futures at the market price of EUR 168.48 per tonne, resulting in a gain of EUR 18.50/ton. Since each Euronext Milling Wheat call option covers 50 tonnes of wheat, gain from the long call position is EUR 925.00. Deducting the initial premium of EUR 488.50 you paid to buy the call option, your net profit from the long call strategy will come to EUR 436.50.

Long Wheat Call Option Strategy
Gain from Option Exercise=(Market Price of Underlying Futures - Option Strike Price) x Contract Size
=(EUR 168.50/ton - EUR 150.00/ton) x 50 ton
=EUR 925.00
Investment=Initial Premium Paid
=EUR 488.50
Net Profit=Gain from Option Exercise - Investment
=EUR 925.00 - EUR 488.50
=EUR 436.50
Return on Investment=89%

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

Learn More About Wheat Futures & Options Trading

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