Trade orange juice options

Orange juice trading has become popular globally and trading volumes continue to increase. Being one of the world's most popular fruit juices, orange juice trading attracts a variety of market participants which include the farmers, processors, storage-houses, market makers and arbitrageurs. Multiple financial instruments, like futures and options, are available for trading orange juice. Orange article discusses options trading on orange juice contracts, trading scenarios, orange juice trading markets and participant profiles, the risks, rewards, and how the determining factors impact option prices for orange juice trading.

Orange juice options on ICE futures exchange are taken as examples cited throughout the article. Soft Commoditieswhich include cottoncocoaorange juicecoffeesugarare now finding place in options portfolios of active market participants as an alternate class of tradable securities. Lack of storage and processing capabilities before restricted the orange juice to what was called a same-day consumption commodity or a perishable commodity. In trade s, the orange juice industry was revolutionized by the development of frozen concentrated orange juice FCOJ.

While marketmaking, arbitrageand speculation continue to remain the heart of trading, hedging is the primary purpose for which so many products continue to get enabled for trading on leading global exchanges. Hedging is accomplished by derivative products like futures and options which can be efficiently used by producers as well as consumers to accomplish risk management. In orange juice options trading, the underlying asset is one FCOJ-A futures contract.

Orange such futures contact is worth 15, pounds of concentrated orange juice solids. He can then use that futures contract to take one of options actions: Example of Using Orange Juice Options for Hedging. For simplicity, all the below examples use one unit of frozen concentrated orange juice.

Mentions of oranges or orange juice orange to one unit of frozen concentrated orange juice. Realistic calculations are provided in following sections. An orange farmer expects his crop 1 unit of FCOJ, or 15, pounds to be ready for sale by June in six months. The farmer is looking for a hedge or price juice on his crop. To do this, he can buy one orange juice trade option contract. A put option gives the farmer the right to sell the underlying asset at a specified sell juice strike price within a certain timeframe.

The orange farmer selects the option contract with strike price of cents and the expiry in June, orange is when his crop will be ready. Buying the put option will give the orange farmer options right, but not the obligation, to take a short position in one orange juice futures contract at the predetermined price of cents at the time of option expiry. In all the possible scenarios, using a put option of orange juice contracts has provided the farmer dual benefits.

His risk is limited on the downside with a guarantee of minimum price level centsplus he is able to benefit from the upward price moves. On the other side, let us consider an orange juice processor who must buy one unit of frozen concentrated orange juice in six months. The current price of one unit of FCOJ is cents.

To gain price protection, the processor can buy one orange juice call option. She selects an option with strike price of cents and expiry juice of six months in the future. The upfront option juice cost is 4. At the time of expiry, this call option, if in-the-money, will give her the right to take a long orange juice futures position which she can square off at existing market rates to lock orange buy price.

In this case as well, using orange juice options guarantees a maximum capped buy price in all scenarios, with the benefit of lower buy price in case of market price declines. Apart from hedging scenarios, traders actively make speculative bets on orange juice contracts to benefit from price changes and arbitrage opportunities. Marketmakers also make an important contribution by offering options liquidity and tight spreads in the options market.

How Are Orange Juice Options Different from Futures? Ideally, either futures or options can be used for hedging, speculation, or arbitrage. This convenience comes at the cost of nonrefundable option premium being paid upfront and is prone to juice decay. Short options do require margin capital. Long options also limit the losses capped to option premium paidwhile futures have unlimited loss potential on both long and short positions.

Market Profile and Participants of Orange Juice Options Trading. Futures trading in frozen concentrated orange juice started in and is claimed to be one of the reasons for oranges taking one of the top spots in U. Currently, frozen concentrated orange juice futures contracts trade on orange ICE exchange.

The physical settlement of one contract equal to 15, pounds of orange solids is done options delivery in drums or tanks. Allowed countries of origin for oranges are the United States, Brazil, Costa Rica, and Mexico.

Brazil tops the orange-producing nations list followed by the United States. These two countries are the most influential markets for determining international orange prices. Around 98 percent of U. The concentration of most of the crop in a single location and the possibilities of extreme weather events, as well as similar conditions in Brazil, have led to high uncertainty and hence high volatility in orange prices.

This volatility is reflected in orange options valuations. Here is the volatility graph as available from ICE exchange report Source: Such varying volatility leads to high volatility skewwhich makes orange juice option contracts suitable to trade ratio spreads.

Ratio spreads trade options fits those instruments which have high volatility skew i. The ICE Exchange has FCOJ A options available for trading across the cities of New York, London and Singapore, ideally covering all geographical locations across APAC, Europe, and the United States during the hour cycle. Any agricultural commodity is affected by weather and disease. Oranges are no exception. In fact, the majority of oranges for orange juice are grown in two locations, Florida and Brazil.

This means that an extreme weather or disease event in one location can disturb or even destroy a huge amount of global Trade supply. Both countries are impacted by hurricanes and unseasonable freezing and frosts.

Juice also suffers from droughts from May to June which can affect the orange crop. These weather events impact the orange crop, which impacts FCOJ prices trade options prices.

Orange juice options traders must pay close attention to seasons and weather forecasts. Hurricane forecasts can result in steep price rises as traders anticipate damage to the orange crop. Once the hurricane passes, prices will adjust to reflect the juice damage suffered by the crop. In anticipation of the winter freeze damaging the orange crop and reducing supply, prices often go up in November.

This price spike can reverse in December and January once the extent of freeze damage becomes clear. The ICE exchange report Source: CRB-Infotech provides the following illustration:. Traders should also be aware of how changes in consumption habits can affect orange juice prices.

An increase in consumption in the country where the oranges are grown trade reduce the export supply. Consumers could stop viewing orange juice as a health drink options move on to other beverages, as has been happening in the United States. The reduction in consumption can lead to price declines.

Government policies, local labor laws, and international trade developments can impact orange production and supply. The orange and orange juice demand and orange report from U. Department of Agriculture covers estimates across all orange-producing regions orange the United States and abroad. Orange juice options traders should also follow related news items specific to orange juice trading from popular market and news data providers like Bloomberg.

To trade orange juice options, one needs a commodity trading account with regulated brokers who have authorized membership with the respective exchange. ICE Orange Juice Futures Contract 1 Open - 1 Year FindTheData. Interest as well as diversification requirements have led to traders looking beyond the ordinary security classes of equities, bonds, and plain-vanilla commodities.

Orange juice has been a highly volatile soft commodity in recent years, making it a high-risk trading asset. Apart from the above listed factors which affect the orange spot prices, orange juice option trading is also impacted by factors specific to option pricing models - exercise or strike pricetime to expiryrisk free juice of return interest rateand volatility.

Orange juice option traders should be aware of these dependencies. Trading orange juice options is advisable only for experienced traders who have sufficient knowledge in options trading. Dictionary Term Of The Day. A type of debt instrument that is not secured by physical assets or collateral. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. How To Trade Orange Juice Options By Shobhit Seth April 22, — What is an Orange Juice Options Contract?

Example of Using Orange Juice Options for Hedging For simplicity, all the below examples use one unit of frozen concentrated orange juice. Orange Juice Put Option Calculations at Expiration If the price of orange juice declines to cents per pound, the long orange juice put option will come in-the-money. This means that the strike price is higher than the market price and therefore juice option is worth money. The farmer will exercise the option. The farmer will get the short futures position at cents.

If the price of orange juice stays around the same levels say at cents at the time of expiry, the option will get exercised. He will get the short futures contract at cents and can square it off at cents, giving him a profit of orange cents. He will sell his orange crop at market options of cents. If the price of orange juice rises to say cents at the time of expiry, the option will expire worthless as the current price is higher than strike price of the put option.

The farmer will not be able to exercise the option and will not get the short futures contract. However, he will be able to sell the orange crop at market rates of cents per pound. Orange Juice Call Option Calculations at Expiration: If the price of orange juice declines to cents at the time of expiry, the option will expire worthless as the current price is lower than strike price of call option. The buyer will not be able to exercise the option and will not get the long futures contract.

However, she will be able to buy the oranges at the market rate of cents per pound. His net cost will be She will buy her oranges at market rates of cents. The buyer will get the long futures position at cents. She paid the upfront trade premium of 4. She can buy oranges at the market price of cents, taking the total buy price to Trade Profile and Participants of Orange Juice Options Trading Futures trading in frozen concentrated orange juice started in and is claimed to be one of the reasons for oranges taking one of the top spots in U.

Factors impacting orange price and orange option valuations: CRB-Infotech provides the following illustration: ICE Orange Juice Futures Contract 1 Open - 1 Year FindTheData The Bottom Line Interest as well as diversification requirements have led to traders looking beyond the ordinary security classes of equities, bonds, and plain-vanilla commodities.

From the orange juice we drink to the gas we use to power our vehicles and heat our homes, commodities play important roles in our daily lives. Learn the contract specifications for a few of the most heavily traded commodities. Rational choice theory assumes an individual will always make prudent and trade decisions that yield the most benefits.

Spot price is the current trade at which a security may be bought or sold. Discover the top five companies that Coca-Cola has ownership or an ownership stake in and how changing consumer tastes have influenced the majority of deals. Find out how the Bureau of Labor Statistics and the Bureau of Economic Analysis measure economic growth in the United States Read more about the price elasticity of supply, the law of supply and why a price change would alter the distribution of Learn about demand elasticity, factors that affect the demand options of a good or a service, and how these factors affect Explore the wide variety of available futures contracts traded on exchanges, which range from agricultural commodities to Learn what items futures may be purchased for, what a futures contract is and discover how the futures markets have greatly Debentures are backed only by the general The amount of sales generated for every dollar's worth of assets in a year, calculated by dividing sales by options.

The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated A financial ratio that shows how much a company pays out in dividends each year relative to its share price. An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. A measure of juice performance calculated as operating cash flow minus capital options. Free cash flow Orange represents No thanks, I prefer not making money.

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