Trading Coffee Options

Trading Coffee Options
By www.Options-Trading-Education.com

http://www.options-trading-education.com/24192/trading-coffee-options/
The second most highly traded
commodity in the world next to crude
oil is coffee.

Trading coffee options can be
profitable but requires a unique skill
set.

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Investopedia writes about the perks
of trading coffee options.

“Soft commodities,” which include
cotton, cocoa, coffee, and sugar, are
appearing in portfolios as an
alternate class of trading assets.

Though many other agricultural
produce like orange juice, sugar, and
cotton enjoy the benefit of subsidies
at the regional, national, and
international levels, facilitating their
trade

Coffee production and export do not
enjoy the same number of
subsidizations for international
trade.

So while it is the world’s favorite
drink, coffee is challenging to trade
and price.

Coffee futures have been in existence
since 1882 on the New York Cocoa
Exchange.

The present day center for futures
and options trading for coffee
contracts is the ICE Futures US
exchange.

While other popular options (that
have stocks or indices as the
underlying) allow the option buyer to
(theoretically) purchase the
underlying stock, coffee options have
coffee futures as their underlying.

Exercising an in-the-money (ITM)
coffee call/put option leads the buyer
to a long/short coffee futures
contract, which he can then square
off at market price or rollover as
desired.

Coffee prices are driven by supply and
demand.

The drought in Brazil drove prices up
as Brazil produces forty percent of the
Arabica coffee in the world.

Trading coffee options often has to do
with being a Central and South
American weather forecaster.

Drought in Brazil

Brazil has been experiencing
a devastating drought.

It has not been this dry in the largest
country in South American for nearly
100 years.

National Geographic provides
insight.

In São Paulo, Brazil, which is
suffering its worst drought in almost
a century, Maria de Fátima dos
Santos has lived for days at a time
with no water, relying on what she
had carefully hoarded in bottles.

But in the Bolivian Amazon, about
1,800 miles (2,897 kilometers) away,
Nicolás Cartagena recalls the day
almost a year ago when floodwaters
rose to the thatched rooftops of
Indian communities, destroying
crops and washing away homes.

The drought in South America’s
biggest city and the flooding in the
Amazon are being triggered by the
same wind-driven weather
phenomenon that scientists say is
probably a harbinger for more
extreme water shortages and
flooding across the continent.

No one fully understands this boom-
and-bust cycle, but meteorologist
José Marengo says it has been
triggered by a sprawling high-
pressure system that settled
stubbornly over southeastern Brazil.

That region is usually at the end of a
long loop of moisture-bearing trade
winds.

Last year, however, this system went
awry.

The same weather that has
endangered livelihoods and lives in
Sao Paulo reduced the coffee crop in
Brazil last year by about ten million
bags (154 pounds each) driving up
prices.

When trading coffee options on coffee
futures one can look ahead a few
months or a year.

As the weather cycles back around
and the coffee crop returns to normal
those who purchase calls in trading
coffee options may prosper.

Options on Futures
Contracts

The Options Guide explains
how futures options work.

A futures option, or option on
futures, is an option contract in
which the underlying is a single
futures contract.

The buyer of a futures option
contract has the right (but not the
obligation) to assume a particular
futures position at a specified price
(the strike price) any time before the
option expires.

The futures option seller must
assume the opposite futures position
when the buyer exercises this right.

Trading coffee options is really
trading options on coffee futures.

Now that prices are high due to the
drought in Brazil one might expect to
see lower prices in the future when
the rains return.

Those who expect this to happen will
probably buy puts on coffee futures to
benefit from a fall in prices and those
who expect things to get worse will
probably buy calls.

Trading Coffee Options

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Trading Coffee Options