Orange Juice Option Price
The
futures orange juice price, and the orange juice 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 an option contract has intrinsic value it is called “in the money.” If an option contract does
not have intrinsic value it is called “out of the money.”
For
example:
If orange juice is trading at $1.03 a $1 call option is $.03 in
the money so the intrinsic value of the option is $450.
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.
Orange juice option prices do not move in tandem
with futures prices. A $.01 move in your favor in the orange juice futures markets does not necessarily equal to a $.01 increase
in the orange juice option value. The amount that an option value will increase based upon a 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 an orange juice call option has a delta of .5 and the price of the orange juice futures market
increases by $.01 the value of the option will increase by $.005 or $75.
If you
are a speculator with a limited amount of risk capital then orange juice options may be the best way for you to invest
in the orange juice market.
