Coffee options are option contracts in which the underlying asset is a coffee futures contract.
The holder of a coffee 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 coffee futures at the strike price.
This right will cease to exist when the option expire after market close on expiration date.
Coffee Option Exchanges
Coffee option contracts are available for trading at NYSE Euronext (Euronext).
Euronext Coffee option prices are quoted in dollars per metric ton and their underlying futures are traded in lots of 10 tonnes of coffee.
|Exchange & Product Name||Underlying Contract Size||Exercise Style||Option Price Quotes|
|Euronext Coffee Options||10 ton
(Full Contract Specs)
|American||Calls | Puts|
Call and Put Options
Options are divided into two classes – calls and puts. Coffee call options are purchased by traders who are bullish about coffee prices. Traders who believe that coffee prices will fall can buy coffee 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.
Coffee Options vs. Coffee Futures
Compared to the outright purchase of the underlying coffee futures, coffee 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.
Compared to taking a position on the underlying coffee futures outright, the buyer of a coffee option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying coffee futures.
Limit Potential Losses
As coffee options only grant the right but not the obligation to assume the underlying coffee futures position, potential losses are limited to only the premium paid to purchase the option.
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.
Options have a limited lifespan and are subjected to the effects of time decay. The value of a coffee 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.