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 Sugar Futures and Options Market Trading

 

The No Nonsense Guide to Buying and Selling Options

Look Inside the Book at Amazon.com

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*The information contained within this webpage comes from sources believed to be reliable. No guarantees are being made to the content's accuracy or completeness.

 

The History of Sugar and Sugar Futures Trading

For centuries, sugar has been a highly valued and widely traded commodity. Sugar cane production originated, according to historians, some 2,500 years ago on the Indian subcontinent. Today, sugar is a basic part of the production and consumption of many foods worldwide which has made sugar futures very necessary to hedge production and consumption price risk.

 

ICE Sugar Futures and Options Quick Facts

  • 112,000 pound contract size

  • one cent move equals $1,120

  • trades Mar., May, July, Oct.

  • Sugar futures symbol (SB)

 

Here is a brochure from the ICE for sugar futures and options.

ICE sugar brochure

 

The September 11 terrorist attack destroyed the CSCE that was located in the World Trade Center in New York City. It was moved a nearby site and sugar future and sugar option trading were fully functional within within a few days after its destruction. It is a testament to the viability and strength of the futures markets. The Coffee, Sugar, and Cocoa Exchange merged with the (NYBOT) and again with the (ICE) and is the premiere world market for the trading of coffee, sugar and cocoa futures and options, and since 1993. Three sugar futures contracts (world raw, world refined, and domestic raw) are listed at the (ICE). In 1982, the CSCE launched the nation's first exchange-traded option on a futures contract when it introduced options on world sugar futures. Learn More >>>

 

 *Contract information changes from time to time. Please click here to see the most recent contract specifications and click here for the most recent trading hours.

 

Sugar Futures and Options Contract Specifications

Futures Contract Symbol- (SB)

Contact Size- 112,000 pounds

Trading Months -March (H), May (K), July (N) and October (V)

Minimum Price Movement - 1/100 cent/lb, equivalent to $11.20 per contract

Trading Hours- 2:30 am -2:00 pm Eastern Time

 

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

 

Sugar Economics

Most sugar is either consumed in the country where it is produced under government controlled pricing arrangements or moved from one country to another under long-term supply agreements. The sugar not subject to such agreements is freely traded among a number of nations, corporations and individuals. This makes the market for sugar a "residual" market - a market in which freely traded sugar is only a fraction of worldwide production. Since the free market may be approximately 20-25% of world production, a small change in production or consumption can translate to a much larger change in free market sugar supply. The delicate supply/demand balance is a main reason for sugar futures prices/ historical price volatility.

 

The No Nonsense Guide to Buying and Selling Options

 

Supply

There are two main types of sugar grown in the world: sugar cane and sugar beets. Both produce the identical refined sugar product. Sugar cane is a bamboo-like grass grown in semi-topical regions. It accounts for about 70% of world production. Beet sugar comes from the sugar beet plant, which grows in temperate climates and accounts for the balance of world production. Intemperate weather, disease, insects, soil quality and cultivation affect both cane and beet production, as do trade agreements and price support programs.

India, Brazil, China, Thailand, Cuba and Mexico are among the leading sugar cane producers. European Union nations, the Russian Federation and Ukraine produce the majority of all sugar beets. The European Union, Brazil, Thailand, Australia, Cuba and Ukraine are leading sugar exporters.

U.S. sugar cane is grown in Florida, Louisiana, Hawaii, Texas and Puerto Rico. Beet sugar is grown in 14 states, with Minnesota, Idaho, North Dakota and California leading production.

The sugar industry closely monitors the level of sugar stocks relative to sugar consumption as a measure of available supply. In the past, small changes in the ratio have led to large sugar futures price movements in the opposite direction.

 

Demand

Industrialized nations account for most sugar consumption. The European Union, Russian Federation, United States, China and Japan are among the worlds largest sugar importers.

An imbalance between world consumption and production in 1980 again sent sugar futures prices skyward - from around 15 cents per pound at the beginning of the year to about 45 cents per pound in the fall. By 1982, however, sugar futures prices had fallen back to their 1977-79 range, averaging over 8 cents per pound for the year. Ample supplies and an evolving geo-political scene have led to prices in the 2 cents/pound to 16 cents/pound range since then.

Beyond price, other factors influencing sugar demand include: refinery activity; consumer income; candy and confectionery sales; changing eating habits; and sugars use in new technologies, such as ethanol production for automobile fuel. Many South American countries use sugar and corn based ethanol in their unleaded gasoline and diesel engines. An unexpected increase in demand can lead to much higher sugar futures prices.

 

The Role of the Exchange

Since all sugar futures and options contracts are standardized (with delivery months and locations, quantity and grade constant), only price is negotiable. These prices are determined by electronic trading on the exchange.

All trading activity is closely monitored by the Exchange according to guidelines established by the CFTC. The Exchange is committed to maintaining markets of the highest quality. To help fulfill this self- regulatory mandate, the ICE employs advanced technological systems to perform a variety of surveillance and compliance procedures.

 

Trading Sugar Options

In 1982, the CSCE introduced options on world (#11) sugar futures - the nation's first exchange -traded option on commodity futures. 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 have increasingly realized the vast potential of sugar futures options.

 

Buyers

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

Because an option holder is under no obligation to enter the sugar futures market, losses are limited to the premium paid. There are no margin calls. If the underlying sugar futures market moves against an options position, the holder can simply let the option for the sugar futures expire worthless. After all, the holder of an option to buy sugar at 13.00 cents per pound (call option) probably won't be interested in exercising the option if the then-current market price is 10.00 cents per pound. On the other side, potential gains are unlimited, net of the premium cost.

Being able to participate in the market at a known cost with essentially unlimited profit potential has made the purchase of straight call and put options popular among sugar futures investors. The same features allow 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 sugar futures hedge, where gains in the cash market are more wholly offset by sugar futures market losses.

Option holders can exit their position in one of three ways: exercise the option and enter the futures market; sell the options back in the market (at a profit or loss depending on the difference between purchase and sell price); or let 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 sugar 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 sugar 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 sugar futures market at any time upon exercise, they are required to maintain a margin account similar to that for sugar futures positions. 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 sugar futures contracts. The Exchange generally lists several strike prices for each option month: one at or near the sugar futures price and a series above and below. As sugar 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 option strike price and the current sugar 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 price for calls, above for puts). An option not profitable to exercise is "out-of-the-money" (strikes above sugar futures price for calls, below for puts). "At-the-money" options have strike prices at or very near sugar futures prices. In general, an option's premium is at least equal to 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 options 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 sugar futures market. Because high levels of volatility increase the probability 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 Months

Regular options trade on sugar futures contracts having March, May, July and October delivery periods as well as a January expiration option which is based upon the March sugar futures contract. Serial options are short-life options contracts providing additional option expirations on existing sugar futures contracts.

In general, the last trading day for sugar options is the second Friday of the month proceeding the stated futures month.

To see other soft commodities visit cocoa futures, coffee futures, cotton futures and orange juice futures.

Example: Buying a Sugar Call

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

For example, assume that in August an investor expects sugar futures prices to increase by late winter. With March futures trading at 12.00 cents/pound, the investor decides to purchase a March 12.00 call (an at-the-money option) for 0.75 cents/pound. Since each contract represents 112,000 pounds of sugar, the total premium paid is $840.

The maximum loss the holder of a long call can incur is the premium paid, regardless of how far the underlying sugar futures prices fall. The potential profit is unlimited, however, since the option holder gains dollar-for-dollar in the rise of the underlying sugar futures price minus the cost of the premium. Out-of-the-money options do not gain dollar-for-dollar on the rise of the sugar futures price.

 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 Sugar Put

Whereas buyers of calls can profit from rising prices, buyers of put options - rights to sell sugar 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 sugar 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 sugar futures investor in May expecting depressed sugar prices at autumn's onset can purchase October puts. With October sugar futures trading at 12.00 cents/pound, the investor purchases an October 12.00 put for 0.65 cent/pound (0.65 cent x 112,000 pounds = total of $728/contract).

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

Commercial firms can purchase put options against inventory as "insurance" against price decreases. The firm may choose the cost or "deductible" for the insurance by selecting either in-the-money, at-the-money, or out-of the- money puts. For example, say an October 10.00 put would cost 0.08 cent/pound and an October 11.00 put cost 0.27 cent/pound in May when futures were trading at 12.00 cents/pound. The 11.00 put would provide 1.00 cent/pound less protection than the 10.00 put, but it could be obtained at a lower cost.

 

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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.