Buying (Going Long) Rapeseed Futures to Profit from a Rise in Rapeseed Prices

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Contents

Buying (Going Long) Rapeseed Futures to Profit from a Rise in Rapeseed Prices

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In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

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Valuing Common Stock using Discounted Cash Flow Analysis

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Buying (Going Long) Rapeseed Futures to Profit from a Rise in Rapeseed Prices

If you are bullish on rapeseed, you can profit from a rise in rapeseed price by taking up a long position in the rapeseed futures market. You can do so by buying (going long) one or more rapeseed futures contracts at a futures exchange.

Example: Long Rapeseed Futures Trade

You decide to go long one near-month Euronext Rapeseed Futures contract at the price of EUR 292.50 per tonne. Since each Euronext Rapeseed Futures contract represents 50 tonnes of rapeseed, the value of the futures contract is EUR 14,625. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of EUR 1,300 to open the long futures position.

Assuming that a week later, the price of rapeseed rises and correspondingly, the price of rapeseed futures jumps to EUR 321.75 per tonne. Each contract is now worth EUR 16,088. So by selling your futures contract now, you can exit your long position in rapeseed futures with a profit of EUR 1,463.

Long Rapeseed Futures Strategy: Buy LOW, Sell HIGH
BUY 50 tonnes of rapeseed at EUR 292.50/ton EUR 14,625
SELL 50 tonnes of rapeseed at EUR 321.75/ton EUR 16,088
Profit EUR 1,463
Investment (Initial Margin) EUR 1,300
Return on Investment 113%

Margin Requirements & Leverage

In the examples shown above, although rapeseed prices have moved by only 10%, the ROI generated is 113%. This leverage is made possible by the relatively low margin (approximately 9%) required to control a large amount of rapeseed represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

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Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

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

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

Example: Long Rapeseed Call Option

You observed that the near-month Euronext Rapeseed futures contract is trading at the price of EUR 292.50 per tonne. A Euronext Rapeseed call option with the same expiration month and a nearby strike price of EUR 290.00 is being priced at EUR 19.50/ton. Since each underlying Euronext Rapeseed futures contract represents 50 tonnes of rapeseed, the premium you need to pay to own the call option is EUR 975.00.

Assuming that by option expiration day, the price of the underlying rapeseed futures has risen by 15% and is now trading at EUR 336.40 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 rapeseed futures at the strike price of EUR 290.00. This means that you get to buy the underlying rapeseed at only EUR 290.00/ton on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying rapeseed futures at the market price of EUR 336.38 per tonne, resulting in a gain of EUR 46.40/ton. Since each Euronext Rapeseed call option covers 50 tonnes of rapeseed, gain from the long call position is EUR 2,320. Deducting the initial premium of EUR 975.00 you paid to buy the call option, your net profit from the long call strategy will come to EUR 1,345.

Long Rapeseed Call Option Strategy
Gain from Option Exercise = (Market Price of Underlying Futures – Option Strike Price) x Contract Size
= (EUR 336.40/ton – EUR 290.00/ton) x 50 ton
= EUR 2,320
Investment = Initial Premium Paid
= EUR 975.00
Net Profit = Gain from Option Exercise – Investment
= EUR 2,320 – EUR 975.00
= EUR 1,345
Return on Investment = 138%

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

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

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If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Hedging Against Rising Rapeseed Prices using Rapeseed Futures

Businesses that need to buy significant quantities of rapeseed can hedge against rising rapeseed price by taking up a position in the rapeseed futures market.

These companies can employ what is known as a long hedge to secure a purchase price for a supply of rapeseed that they will require sometime in the future.

To implement the long hedge, enough rapeseed futures are to be purchased to cover the quantity of rapeseed required by the business operator.

Rapeseed Futures Long Hedge Example

A biodiesel maker will need to procure 5,000 tonnes of rapeseed in 3 months’ time. The prevailing spot price for rapeseed is EUR 292.50/ton while the price of rapeseed futures for delivery in 3 months’ time is EUR 290.00/ton. To hedge against a rise in rapeseed price, the biodiesel maker decided to lock in a future purchase price of EUR 290.00/ton by taking a long position in an appropriate number of Euronext Rapeseed futures contracts. With each Euronext Rapeseed futures contract covering 50 tonnes of rapeseed, the biodiesel maker will be required to go long 100 futures contracts to implement the hedge.

The effect of putting in place the hedge should guarantee that the biodiesel maker will be able to purchase the 5,000 tonnes of rapeseed at EUR 290.00/ton for a total amount of EUR 1,450,000. Let’s see how this is achieved by looking at scenarios in which the price of rapeseed makes a significant move either upwards or downwards by delivery date.

Scenario #1: Rapeseed Spot Price Rose by 10% to EUR 321.75/ton on Delivery Date

With the increase in rapeseed price to EUR 321.75/ton, the biodiesel maker will now have to pay EUR 1,608,750 for the 5,000 tonnes of rapeseed. However, the increased purchase price will be offset by the gains in the futures market.

By delivery date, the rapeseed futures price will have converged with the rapeseed spot price and will be equal to EUR 321.75/ton. As the long futures position was entered at a lower price of EUR 290.00/ton, it will have gained EUR 321.75 – EUR 290.00 = EUR 31.75 per tonne. With 100 contracts covering a total of 5,000 tonnes of rapeseed, the total gain from the long futures position is EUR 158,750.

In the end, the higher purchase price is offset by the gain in the rapeseed futures market, resulting in a net payment amount of EUR 1,608,750 – EUR 158,750 = EUR 1,450,000. This amount is equivalent to the amount payable when buying the 5,000 tonnes of rapeseed at EUR 290.00/ton.

Scenario #2: Rapeseed Spot Price Fell by 10% to EUR 263.25/ton on Delivery Date

With the spot price having fallen to EUR 263.25/ton, the biodiesel maker will only need to pay EUR 1,316,250 for the rapeseed. However, the loss in the futures market will offset any savings made.

Again, by delivery date, the rapeseed futures price will have converged with the rapeseed spot price and will be equal to EUR 263.25/ton. As the long futures position was entered at EUR 290.00/ton, it will have lost EUR 290.00 – EUR 263.25 = EUR 26.75 per tonne. With 100 contracts covering a total of 5,000 tonnes, the total loss from the long futures position is EUR 133,750

Ultimately, the savings realised from the reduced purchase price for the commodity will be offset by the loss in the rapeseed futures market and the net amount payable will be EUR 1,316,250 + EUR 133,750 = EUR 1,450,000. Once again, this amount is equivalent to buying 5,000 tonnes of rapeseed at EUR 290.00/ton.

Risk/Reward Tradeoff

As you can see from the above examples, the downside of the long hedge is that the rapeseed buyer would have been better off without the hedge if the price of the commodity fell.

An alternative way of hedging against rising rapeseed prices while still be able to benefit from a fall in rapeseed price is to buy rapeseed call options.

Learn More About Rapeseed Futures & Options Trading

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Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

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Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

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Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

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    Best Options Broker 2020!
    Great Choice For Beginners!
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    Free Demo Account 1000$!
    Get Your Sign-Up Bonus Now!

  • BINOMO
    BINOMO

    Only For Experienced Traders!

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