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

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


Example: Long Coffee Call Option

You observed that the near-month Euronext Robusta Coffee (No. 409) futures contract is trading at the price of USD 1,648 per tonne. A Euronext Coffee call option with the same expiration month and a nearby strike price of USD 1,600 is being priced at USD 109.87/ton. Since each underlying Euronext Robusta Coffee (No. 409) futures contract represents 10 tonnes of coffee, the premium you need to pay to own the call option is USD 1,099.

Assuming that by option expiration day, the price of the underlying coffee futures has risen by 15% and is now trading at USD 1,895 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 coffee futures at the strike price of USD 1,600. This means that you get to buy the underlying coffee at only USD 1,600/ton on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying coffee futures at the market price of USD 1,895 per tonne, resulting in a gain of USD 295.00/ton. Since each Euronext Robusta Coffee (No. 409) call option covers 10 tonnes of coffee, gain from the long call position is USD 2,950. Deducting the initial premium of USD 1,099 you paid to buy the call option, your net profit from the long call strategy will come to USD 1,851.

Long Coffee Call Option Strategy
Gain from Option Exercise = (Market Price of Underlying Futures – Option Strike Price) x Contract Size
= (USD 1,895/ton – USD 1,600/ton) x 10 ton
= USD 2,950
Investment = Initial Premium Paid
= USD 1,099
Net Profit = Gain from Option Exercise – Investment
= USD 2,950 – USD 1,099
= USD 1,851
Return on Investment = 168%

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 coffee option sale will be equal to it’s intrinsic value.