Coffee Option Price
The
futures coffee price, and the coffee option price is not the same thing. Option price valuation is not as straightforward
as futures valuation. Option premium is comprised of intrinsic value and extrinsic value.
An
option has intrinsic value if the market is trading above the strike price of a call option, or below the strike price of
a put option. If a option contract has intrinsic value it is called “in the money.” If a option contract does
not have intrinsic value it is called “out of the money.”
For
example:
If coffee is trading at $1.33 a $1.30 call option is $.03 in the
money so the intrinsic value of the option is $1,125.
The extrinsic value of the
option is its “time value.” Extrinsic value takes into account the possibility that an option may go in the money
by expiration. The more time that an option has, the more extrinsic value it has. As an option approaches its expiration date,
it looses value. This is called time decay. At expiration, an option has no extrinsic value so if the option is out of the
money it expires worthless.
Coffee option prices do not move in tandem with futures
prices. A $.01 move in your favor in the coffee futures markets does not necessarily equal to a $.01 increase in the coffee
option value. The amount that an option value will increase based upon an increase in its futures price is called its delta.
Call option deltas are measures from 0 to 1. As an option goes from “out of the money” to “in the money”
its delta increases.
For example:
If
a coffee call option has a delta of .5 and the price of the coffee futures market increases by $.01 the value of the option
will increase by $.005 or $187.50.
If you are a speculator with a limited amount
of risk capital then coffee options may be the best way for you to invest in the coffee market.
