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Cocoa Futures and Options Market Trading

 

The No Nonsense Guide to Buying and Selling Options

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Learn why traders around the world invest in futures and options. We are happy to answer all of your questions about cocoa futures and cocoa options. Click here for answers to your questions.

 

The History of Cocoa and Cocoa Futures Trading

Cocoa is the common name for a powder derived from the fruit seeds of the cacao tree. Roughly 2/3 of cocoa bean production is used to make chocolate and 1/3 to make cocoa powder. Cocoa was originally combined with spices and served as a luxury drink in the Aztec empire. The Aztec Emperor, Montezuma, shared the cocoa and spice beverage with the explorer and later conqueror of the Aztecs, Hernando Cortez. The cocoa was brought back to Spain in the 16th century by Cortez and his Conquistadores and was called "the food of the gods". For nearly a century, chocolate (usually made from cocoa, sugar, cinnamon and vanilla) became an exclusive drink of the Spanish Royal Court, until it gradually achieved a wider popularity in cocoa houses of major European cities when it became less expensive.

 

ICE Cocoa Futures and Options Quick Facts

  • 10 metric ton contract size

  • $1 move equals $10

  • Trades March, May, July, Sept., Dec.

  • Cocoa futures symbol (CC)

 

 

In 1925 the world's first cocoa bean future was started at the New York Cocoa Exchange. In 1986 the first cocoa options began trading. Cocoa future trading is now a very active future trading contract. Cocoa options on the cocoa futures contracts have enjoyed much higher volume and consequently much greater liquidity recently.

Contact us for specific cocoa futures and cocoa options data.

During the September 11 terrorist attacks the Coffee, Sugar and Cocoa Exchange (CSCE) was destroyed but within days the cocoa futures and cocoa options markets were once again trading. This is a testament to the strength and viability of the soft futures markets. The CSCE has since merged to become part of the New York Board of Trade (NYBOT) who merged with The Intercontinental Exchange (ICE). The ICE is still located in New York.

cocoa pods futures and options

 

ICE Contract Specifications for Cocoa Future contracts

Trading Unit

10 metric tons (22,046 pounds)

Trading Hours

4:00 a.m. - 2 p.m. (NY time) (Verify with exchange)

Price Quotation

Dollars per metric ton

Delivery Months

March, May, July, September, December

Futures Ticker Symbol

CC

**Click Here Now! for actual cocoa futures and options, quotes, prices, expirations, charts .....

 

 

Cocoa Economics

Cocoa Supply

The cocoa trade is strictly a tropical plant, thriving only in hot, rainy climates with cultivation generally confined to areas not more than 20 degrees north or south of the equator. The tree takes four or five years after planting to yield cocoa beans and from eight to ten years to achieve maximum production. When ripe, these pods are cut down and opened, and the beans are removed and fermented for three to nine days and then they are sun dried and cleaned. Then the cacao seeds are roasted the bring out the chocolate flavor.

The cocoa butter extracted from the bean is used in a number of products, ranging from cosmetic to pharmaceuticals, but its main use is in the manufacture of chocolate candy.

Currently, the Ivory Coast and Ghana are the world's leading cocoa producing nations. Recent estimates are 50% of the world's cocoa originates there. Conflict and government turmoil in the Ivory Coast region has hindered cocoa production and added considerable volatility to the cocoa markets over recent years. Indonesia ranks next among major world producers, followed by Brazil, Nigeria and Malaysia.

 

The Role of the Exchange and Cocoa Futures

The (NYBOT) recently merged with the (ICE) and is the world's premier forum for cocoa futures and options trading. Cocoa future trading and cocoa option trading has gained much popularity in recent years and liquidity has increased accordingly.

 

Trading Cocoa Futures

A cocoa futures contract is a standardized, binding agreement to make or take delivery of a specified quantity and grade of a commodity at an established point in the future and at an agreed upon price. A contract buyer is obligated to take delivery of cocoa according to contract terms at a specified date, while sellers are obligated to make delivery. Buyers are considered to be "long" and sellers "short" the futures contract. "Standardized" means the terms, size and duration of the contract are predetermined and meet certain criteria. The only negotiable variable is the contract price.

Margin

Toward ensuring contract performance, the Exchange requires that market participants make original and variation margin payments. Original margins are "good faith deposits" established to ensure market participants will meet their contractual financial obligations.

Leverage

A major attraction of cocoa futures trading for investors is leverage. Since futures transactions do not require full advance payment for the commodity (just the margin), the buyer of a futures contract which increases in value (or the seller of a futures contract which decreases in value) can realize a profit which can be substantial in relation to the commitment of capital. Assume that an investor can purchase cocoa futures contracts (each representing 10 metric tons of cocoa) with a $1,100 margin deposit. If the investor bought one contract at $1,250/metric ton (12,500 worth of cocoa) and sold the contract when cocoa reached $1,410/metric ton, he would realize a profit of $1,600 ($160 x 10 metric tons = $1,600) - a 145% return on the initial margin deposit, which is returned when the position is liquidated.

That's leverage, and it can be a powerful investment tool. Of course, leverage works both ways. If cocoa prices were to move opposite from the anticipated direction, an investor could lose the entire margin deposit and more. Futures trading is very risky.

 

Trading Cocoa Future Options

In 1986, cocoa futures options began trading. Because options strategies are numerous and can be tailored to meet a wide array of risk profiles, time horizons and cost considerations, hedgers and investors alike are increasingly realizing their vast potential. As a result, cocoa options volume has grown considerably.

Buyers

Cocoa options buyers obtain the right, but not the obligation, to enter the underlying cocoa futures market at a predetermined price within a specific period of time. A "call" option confers the right to buy (go long) futures, while a "put" option confers the right to sell (go short) futures. The predetermined price is known as the "strike" or "exercise" price, and the last day when an option may be exercised is the "expiration date". Buyers pay sellers a premium for their option rights.

Because an option holder is under no obligation to enter the cocoa futures market, losses are strictly limited to the purchase value: there are no margin calls. If the underlying cocoa futures market moves against an option position, the holder can simply let the option expire worthless. On the opposite side, potential gains are unlimited, net of the premium cost. That feature allows hedgers to guard against adverse price movements at a known cost without foregoing the benefits of favorable price movements. In an options hedge, gains are only reduced by the premium paid - unlike a futures hedge, where gains in the cash market are offset by futures market losses.

Cocoa option holders can exit their position in one of three ways: exercising the option and entering the cocoa futures market, selling the option back in the market, or letting the option expire worthless.

Sellers

Option sellers, or "writers", receive a premium for granting option rights to buyers. In exchange for the premium, writers assume the risk of being assigned a position opposite that of the buyer in the underlying cocoa futures market at any time prior to expiration. Writers of call options must be prepared to assume short positions at the option's strike price at the option holder's discretion, while put option writers may be assigned long futures positions.

Writing put and call options can serve as a source of additional income during relatively flat market periods. Because option writers must be prepared to enter the futures market at any time upon exercise, they are required to maintain a margin account similar to that of for futures. Sellers can offset their positions by buying back their options in the market.

Strike Prices

Traders agree on premiums in an open outcry auction similar to that for futures contracts. The Exchange generally lists seven strike prices for each option month: one at or near the futures price, three above and three below. As futures prices rise or fall, higher or lower strike prices are introduced according to a present formula.

Premiums

A number of factors impact premium levels in the market. "Intrinsic value" is the dollars and cents difference between the cocoa option strike price and the current cocoa futures price. An option with intrinsic value has a strike price making it profitable to exercise and is said to be "in-the-money" (strikes below futures prices for calls, above for puts). An option not profitable to exercise is "out-of-the-money" (strikes above futures prices for calls, below for puts). "At-the-money" options have strike prices at or very near futures prices. In general, an option's premium is at least equal to its intrinsic value (the amount by which it is "in-the-money").

"Time value" is the sum of money buyers are willing to pay for an option over and above any intrinsic value the option may presently have. Time value reflects a buyer's anticipation that, at some point prior to expiration, a change in the futures price will result in an increase in the option's value. The premium for an "out-of-the-money" option is entirely a reflection of its time value.

Premiums are also affected by volatility in the underlying cocoa futures market. Because high levels of volatility increase the probability that an option will become valuable to exercise, sellers command larger premiums when markets are more volatile. Finally, premiums are affected by supply and demand forces and interest rates relative to alternative investments.

Option Month

Cocoa options are traded on futures contracts having March, May, July, September and December delivery periods. The option month refers to the futures contract delivery month rather than the month in which the cocoa option actually expires.

In general, the last trading day for cocoa options is the first Friday of the month proceeding the cocoa futures contract delivery month.

 

Buying a Cocoa Call Option

Buying a call can be employed to profit from, or achieve protection against, an increase in the price of cocoa. Except for the cost of the option, the profit potential is similar to having a long position in the underlying cocoa futures contract. Moreover, this strategy may provide greater "staying power" in the event of a temporary price setback than having an outright long futures position. Reason: there are no margin calls because one cannot lose more than the premium paid for the option. Learn More >>>

For example, assume in July, an investor forecasts higher cocoa prices by winter's onset. With December futures trading at $1,100/metric ton, the investor decides to purchase a December 1100 call (an at-the-money option) for $95/metric ton. Since each contract represents 10 metric tons of cocoa, the total premium paid is $950.

The maximum loss the investor can incur is the premium paid, regardless of how far futures prices fall. However, the potential profit is unlimited since the option holder gains dollar-for-dollar in the rise of the underlying futures price minus the cost of the premium.

Call options can be purchased for price protection as well as for the pursuit of trading profits. Commercial firms buying call options effectively establish a maximum purchase cost equal to the exercise price of the option plus the option premium. Employed in this way, options offer hedgers price "insurance", while at the same time allowing them to benefit from price declines since they can allow the option to expire unexercised.

Example: Buying a Cocoa Put Option

Whereas buyers of calls can profit from rising prices, buyers of put options - rights to sell futures contracts at the option exercise price - can profit from price declines. Except for this difference, the properties of puts and calls are the same.

To realize a profit at expiration, the underlying futures price must be below the option exercise price by an amount greater than the premium paid for the option. If it is higher, a portion or the entire premium will be lost. In no case, however, can losses exceed the premium paid.

For example, the investor in February expecting depressed cocoa prices during the summer can purchase July puts. With July futures trading at $1,200/metric ton, the investor purchases a July 1200 put for $100/metric ton ($100 x 10 metric ton = $1,000 total).

 

To visit other soft commodities go to coffee futures ,cotton futures, orange juice futures and sugar futures.

The investor can lose no more than the premium paid, no matter how high cocoa futures prices climb. On the other hand, if prices decline, the investor can realize substantial gains. A cocoa futures sale at the strike price would have similar profit opportunities in a falling market - plus the premium paid to obtain the option. However, losses from a short cocoa futures position would be unlimited in a rising market.

 

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The information presented in this commodity futures and options site is not investment advice and is for informational purposes only. This information can be considered a solicitation to enter into a derivatives trade.Investments in commodity futures and options involves a high degree of risk, your investment may fall as well as rise, you may lose all your original investment and you may also have to pay more than the original amount invested. Past or simulated performance is not a guide to future performance. Futures Trading is not suitable for everyone. This site provides information on online commodity trading, online future trading, commodity future online trading, commodity options, futures trading commodity brokerage.