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

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Contents

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

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

Example: Long Sugar Futures Trade

You decide to go long one near-month Euronext Raw Sugar (No. 408) Futures contract at the price of USD 0.1111 per pound. Since each Euronext Raw Sugar (No. 408) Futures contract represents 112000 pounds of sugar, the value of the futures contract is USD 12,443. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 1,456 to open the long futures position.

Assuming that a week later, the price of sugar rises and correspondingly, the price of sugar futures jumps to USD 0.1222 per pound. Each contract is now worth USD 13,688. So by selling your futures contract now, you can exit your long position in sugar futures with a profit of USD 1,244.

Long Sugar Futures Strategy: Buy LOW, Sell HIGH
BUY 112000 pounds of sugar at USD 0.1111/lb USD 12,443
SELL 112000 pounds of sugar at USD 0.1222/lb USD 13,688
Profit USD 1,244
Investment (Initial Margin) USD 1,456
Return on Investment 85.4615%

Margin Requirements & Leverage

In the examples shown above, although sugar prices have moved by only 10%, the ROI generated is 85.4615%. This leverage is made possible by the relatively low margin (approximately 11.7012%) required to control a large amount of sugar 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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Effect of Dividends on Option Pricing

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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 Sugar Call Options to Profit from a Rise in Sugar Prices

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

Example: Long Sugar Call Option

You observed that the near-month Euronext White Sugar (No. 407) futures contract is trading at the price of USD 324.60 per tonne. A Euronext Sugar call option with the same expiration month and a nearby strike price of USD 320.00 is being priced at USD 21.64/ton. Since each underlying Euronext White Sugar (No. 407) futures contract represents 50 tonnes of sugar, the premium you need to pay to own the call option is USD 1,082.

Assuming that by option expiration day, the price of the underlying sugar futures has risen by 15% and is now trading at USD 373.30 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 sugar futures at the strike price of USD 320.00. This means that you get to buy the underlying sugar at only USD 320.00/ton on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying sugar futures at the market price of USD 373.29 per tonne, resulting in a gain of USD 53.30/ton. Since each Euronext White Sugar (No. 407) call option covers 50 tonnes of sugar, gain from the long call position is USD 2,665. Deducting the initial premium of USD 1,082 you paid to buy the call option, your net profit from the long call strategy will come to USD 1,583.

Long Sugar Call Option Strategy
Gain from Option Exercise = (Market Price of Underlying Futures – Option Strike Price) x Contract Size
= (USD 373.30/ton – USD 320.00/ton) x 50 ton
= USD 2,665
Investment = Initial Premium Paid
= USD 1,082
Net Profit = Gain from Option Exercise – Investment
= USD 2,665 – USD 1,082
= USD 1,583
Return on Investment = 146%

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

Learn More About Sugar 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. ]

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. ]

Sugar Futures

Sugar Futures

Sugar Futures Market

Sugar futures are a highly valued commodity futures product. The appeal of sugar futures as an investment stems from its wide use throughout the globe. As such a popular commodity futures product, investors can use sugar futures to make plays against strong or weak economies, as well as weather conditions and government policies around the world.

Sugar Futures History

Sugar futures began trading in the United States in 1914 on the coffee, sugar and cocoa exchange in New York and the New York Board of Trade. Options on sugar futures were introduced in 1982.

Sugar as a product dates back as far as fourth century India and was once so rare it was referred to as “white gold”. Sugar cane, which was the first source of sugar, is a perennial grass that is grown in tropical and subtropical areas. Eventually, beets were discovered as a source of sugar.

Today, sugar can be found throughout the world, with more than 120 countries producing it for domestic and international use.

Sugar Market Facts

Around 160 million metric tons of sugar is produced every year, with the largest producers being Brazil, India and the European Union. The primary driver of sugar prices is government regulation. Many governments heavily subsidize their sugar manufacturers to “dump” cheaply priced sugar in the market.

Currently, 69 percent of the world’s sugar is consumed in its country of origin, while the rest is traded on international markets.

World Sugar No. 11 & U.S. Sugar No. 16

The two sugar futures markets that are traded include world sugar No.11 and U.S. sugar no. 16. While Sugar no. 11 is the most commonly-traded international commodities futures product, Sugar no. 16 futures prices are often higher. The discrepancy in prices is due to subsidies and a tariff program that supports U.S. sugar farmers.

Trading Sugar Futures

  • Sugar futures are traded at the InterContinental Exchange (ICE) in contract months January, March, May, July and October.
  • Sugar futures are traded under the name sugar no. 11, with prices quoted in U.S. dollars per pound, and a minimum fluctuation of $0.0001 per pound.
  • Sugar no. 11 is the main commodity futures contract traded, while sugar no. 16 is used for the delivery of cane sugar of U.S. or duty-free origin, delivered in bulk to New York, Baltimore, Galveston, New Orleans or Savannah.
  • One sugar futures contract represents 112,000 pounds of raw cane sugar.
  • Sugar is a major source for ethanol production and therefore, crude oil futures prices and the demand for ethanol impact the international price of sugar futures.

You can learn more about Soft futures by downloading our guide, Free Fundamentals of Trading Soft Futures.

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