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Wheat Options Explained
Wheat options are option contracts in which the underlying asset is a wheat futures contract.
The holder of a wheat 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 wheat futures at the strike price.
This right will cease to exist when the option expire after market close on expiration date.
Wheat Option Exchanges
Wheat option contracts are available for trading at NYSE Euronext (Euronext).
Euronext Milling Wheat option prices are quoted in dollars and cents per bushel and their underlying futures are traded in lots of 50 tonnes of wheat.
Euronext Feeder Wheat options are traded in contract sizes of 100 tonnes and their prices are quoted in pounds and pence per metric ton.
| Exchange & Product Name | Underlying Contract Size | Exercise Style | Option Price Quotes |
| Euronext Milling Wheat Options | 50 ton (Full Contract Specs) | American | Calls | Puts |
| Euronext Feeder Wheat Options | 100 ton (Full Contract Specs) | American | Calls | Puts |
Call and Put Options
Options are divided into two classes - calls and puts. Wheat call options are purchased by traders who are bullish about wheat prices. Traders who believe that wheat prices will fall can buy wheat 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.
Wheat Options vs. Wheat Futures
Compared to the outright purchase of the underlying wheat futures, wheat 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 wheat futures outright, the buyer of a wheat option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying wheat futures.Limit Potential Losses
As wheat options only grant the right but not the obligation to assume the underlying wheat 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 wheat 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
- Wheat Futures Basics
- Buying Wheat Futures to Profit from a Rise in Wheat Prices
- Selling Wheat Futures to Profit from a Fall in Wheat Prices
- Wheat Call Option Trading Basics
- Wheat Put Option Trading Basics
- Hedging Against Rising Wheat Prices with Wheat Futures
- Hedging Against Falling Wheat Prices with Wheat Futures
