Buying Corn Put Options to Profit from a Fall in Corn Prices

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Contents

Buying Corn Put Options to Profit from a Fall in Corn Prices

If you are bearish on corn, you can profit from a fall in corn price by buying (going long) corn put options.

Example: Long Corn Put Option

You observed that the near-month Euronext Corn futures contract is trading at the price of EUR 129.25 per tonne. A Euronext Corn put option with the same expiration month and a nearby strike price of EUR 130.00 is being priced at EUR 8.6200/ton. Since each underlying Euronext Corn futures contract represents 50 tonnes of corn, the premium you need to pay to own the put option is EUR 431.00.

Assuming that by option expiration day, the price of the underlying corn futures has fallen by 15% and is now trading at EUR 109.90 per tonne. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying corn futures at the strike price of EUR 130.00. In other words, it also means that you get to sell 50 tonnes of corn at EUR 130.00/ton on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying corn futures at the market price of EUR 109.86 per tonne, resulting in a gain of EUR 20.10/ton. Since each Euronext Corn put option covers 50 tonnes of corn, gain from the long put position is EUR 1,005. Deducting the initial premium of EUR 431.00 you paid to purchase the put option, your net profit from the long put strategy will come to EUR 574.00.

Long Corn Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (EUR 130.00/ton – EUR 109.90/ton) x 50 ton
= EUR 1,005
Investment = Initial Premium Paid
= EUR 431.00
Net Profit = Gain from Option Exercise – Investment
= EUR 1,005 – EUR 431.00
= EUR 574.00
Return on Investment = 133%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put 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 corn option sale will be equal to it’s intrinsic value.

Learn More About Corn Futures & Options Trading

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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. ]

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    Perfect For Beginners!
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    Get Your Sing-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker. Only For Experienced Traders!

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. ]

Buying Put Options: How to Make Money When Stocks Fall In Price

Buying Put options is how you insure your stock portfolio against a loss. And they are also used to make money when stock’s fall in price.

They are essentially the opposite of Call options…

Buying Call options allow you to make money when stocks rise in price and buying Put options allow you to make money stocks fall in price.

You see, most investors watch the stock market fall in price and complain about how much money they are losing.

During these times, buy-and-hold and dollar cost averaging doesn’t seem to soothe the soul.

As a buy-and-hold investor you feel completely helpless during market crashes.

And while you are feeling helpless there are other investors that are happy and worry free because they insured their stock portfolios with Put options.

By using this relatively unknown investment tool you feel more in control because you are able to make money on the way down.

Put options are a way to profit from a downturn in the stock market without shorting the stock. Short selling is beyond the scope of this lesson however if you understand the concept of shorting stocks it will help you to understand the power of Put options.

In the previous two lessons we discussed how Put options are used as a hedge (insurance) against a decline in stock price. This lesson focuses on yet another use, buying Put options to trade them for a profit.

You are going to buy Put contracts that you think will increase in value. Once they do increase in value you will sell them for a profit.

Buying Put Options.

A Put option gives its buyer the right, but not the obligation, to SELL shares of a stock at a specified price on or before a given date.

Buying ONLY Put’s should not be confused with Married Puts or Protective Puts. Married and Protective Puts are purchased to protect shares of stock from a sharp decline in price.

The major difference between the two is with Married/Protective Puts there is “ownership in stock”.

Buying Put options involves just that, buying only the Put option.

When you buy only the Put option it completely changes the dynamics of the trade. You want the stock price to fall because that is how you make your profit.

In “most” cases you never intend on exercising your rights to sell the stock. You just want to benefit from the movement of the stock without having to own the stock, and you can do this with Put options.

A Put option locks in the selling price of a stock.

So if you buy an option with a strike price of $70 this will allow you to sell the stock for $70 anytime between the day you buy the option and when it expires.

So if the stock falls to $60 your Put option will go up in value. Why, because you hold a contract that gives you the right to sell something for more than its market value.

Yes this seems unfair and logically this doesn’t make sense, but this is just the nature of the terms of the option contract.

It’s like baseball cards. Baseball cards are literally pieces of cardboard, yet some of them can sell for thousands of dollars because there are only a limited number of them in the world. Because only a limited number are available it makes the cards more valuable.

With a Put option you hold a contract that lets you sell something for MORE than it’s worth. This makes your contract more valuable so you essentially turn it around and sell it at a higher price.

Risk and Reward.

Since a stock can fall to $0 the maximum profit you can make with a Put option is when the stock falls to $0. Put options gain value when stock prices fall and there is only so far a stock can fall in price.

In the next lesson you will see a real example and how it works, but for now let’s cover the risk.

The max you can lose with a Put is the price you paid for it (that’s a relief). So if the stock goes up in price your Put will lose value. So if it cost you $100 to buy the Put that is as much as you can lose.

It’s better than losing thousands of dollars if you were to purchase the stock and it fell in price.

Advantages of Buying Put Options.

  • Allows you to participate in the downward movement of the stock without having to own or short the stock
  • You only have to risk a relatively small sum of money to buy a Put Option
  • The maximum amount you can lose on a trade is the cost of the Put
  • Leverage (using a small amount of money to make a large sum of money)
  • Higher potential investment returns

Disadvantages of Buying Put Options.

  • The Put option has an expiration date so time works against you
  • The stock has to make a move downward in order for the Put option to increase in value
  • If the stock stays flat or doesn’t move, then the Put option will lose value due to time decay

Verifiable trade example: if you had bought a SPY Dec 2008 120 Put option on 10/1/2007 it would have cost $246.50.

You could have then sold the Put on 12/17/2008 for $2,980.

Thus realizing a profit of $2,733.50 (1,109% ROI).

These are real numbers you can verify yourself.

This is exactly why market crashes are the biggest opportunities to build wealth. Crashes are launching pads that launch you from financial struggle to financial freedom.

That’s why it’s been said that, ” More millionaires were created during the great depression than in any other time in American history.

This is only possible because of the leverage and profit potential of Put options.

Most people only hear about the bad stuff that happened during the Great Depression. They never hear about all the Great Depression Millionaires.

Personally, I HATE losing money so I always learn first how to “not lose money” before I learn “how to make money”. And buying Put options is just one of the ways you can do just that.

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Profitable With Options, Try The “Buffett Strategy”.

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Maybe you are looking for a way to generate a little additional income for retirement. Or maybe you’ve just heard about options, you’re not sure what they are, and you want a simple step-by-step guide to understanding them and getting started with them.

I have no idea if options are even right for you, but I do promise to show you what has worked for me and the exact steps I’ve taken to use them to earn additional income, protect my investments, and to experience freedom in my life.

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Fill in your details below to download your FREE case study. Along with your case study, you’ll also get my daily emails where I share my favorite option trading strategies, examples of the trades I’m currently in, and ways to protect your investments in any market.

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DISCLAIMER: All stock options trading and technical analysis information on this website is for educational purposes only. While it is believed to be accurate, it should not be considered solely reliable for use in making actual investment decisions. This is neither a solicitation nor an offer to Buy/Sell futures or options. Futures and options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. Please read “Characteristics and Risks of Standardized Options” before investing in options. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

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

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

Example: Long Corn Call Option

You observed that the near-month Euronext Corn futures contract is trading at the price of EUR 129.25 per tonne. A Euronext Corn call option with the same expiration month and a nearby strike price of EUR 130.00 is being priced at EUR 8.6200/ton. Since each underlying Euronext Corn futures contract represents 50 tonnes of corn, the premium you need to pay to own the call option is EUR 431.00.

Assuming that by option expiration day, the price of the underlying corn futures has risen by 15% and is now trading at EUR 148.60 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 corn futures at the strike price of EUR 130.00. This means that you get to buy the underlying corn at only EUR 130.00/ton on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying corn futures at the market price of EUR 148.64 per tonne, resulting in a gain of EUR 18.60/ton. Since each Euronext Corn call option covers 50 tonnes of corn, gain from the long call position is EUR 930.00. Deducting the initial premium of EUR 431.00 you paid to buy the call option, your net profit from the long call strategy will come to EUR 499.00.

Long Corn Call Option Strategy
Gain from Option Exercise = (Market Price of Underlying Futures – Option Strike Price) x Contract Size
= (EUR 148.60/ton – EUR 130.00/ton) x 50 ton
= EUR 930.00
Investment = Initial Premium Paid
= EUR 431.00
Net Profit = Gain from Option Exercise – Investment
= EUR 930.00 – EUR 431.00
= EUR 499.00
Return on Investment = 116%

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

Learn More About Corn Futures & Options Trading

You May Also Like

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. ]

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. ]

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker. Only For Experienced Traders!

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