Coffee Futures and Options
Market Trading
Call
1-800-915-4716 or
Click Here and
open your account now!
FREE Practice Account
T & K Futures and Options, Inc.
is a federally licensed U.S. corporation specializing in helping investors
implement futures and options investment strategies. We are happy to answer all of your questions about coffee futures
and coffee options. Click here for answers to your
questions.
The History of Coffee and Coffee Futures Arabica Trading
Coffee's beginnings are lost somewhere in mankind's ancient
history, but it is
believed to have originated in the Ethiopia around 3 A.D., where ground beans
were used to season food by the various inhabitants
of that area. In about 1300 A.D., the
Southern Arabians first roasted and brewed coffee
for use as a beverage. The Middle Eastern hub of the
valuable trading routes to Asia and later Africa
efficiently dispersed the new valuable source of
commerce to European consumers. Today, coffee is one of the
world's most popular drinks and is among the world's
most important internationally traded commodities,
with a number of economies largely dependent in its
trade. Coffee has even been found to have some
health benefits such as helping to stop the onset of Alzheimer's disease,
minimizing diabetes and
blood thinning.
ICE
Coffee Futures and Options Quick Facts
-
37,500 pound contract size
-
one cent move equals $375
-
Trades March, May, July, Sep., Dec.
Fundamental analysis for the coffee market
Top Producers 2010-2011
Other fundamental factors affecting coffee prices
The Coffee, Sugar and Cocoa Exchange (CSCE) was the
premier world market for the trading of coffee
futures,
sugar futures and cocoa futures and options, and since 1993,
an innovator in the trading of futures and options
in dairy products. The CSCE was located in the world
trade center before it was destroyed in the
September 11 terror attacks. Symbolic of the
strength and stability of the futures markets,
coffee, cocoa and sugar futures contracts were
actively trading within one week of the destruction
of the exchange. Since then the CSCE has since merged to become part of the New York
Board of Trade (NYBOT) and merged again with the Intercontinental Exchange (ICE).
Contact
us at contact@tkfutures.com
for specific coffee futures and coffee options data.
Coffee Futures Economics
Coffee Supply
Coffee trees, or bushes, grow primarily in
subtropical climates and are actually an evergreen shrub that has the potential
to grow 100 feet tall. Coffee trees grown between the Tropic of Cancer and the
Tropic of Capricorn where year-round temperatures averaging 70 degrees
Fahrenheit. Coffee beans are the seeds of
cherry-sized berries which are the fruit of the coffee tree.
Coffee is primarily classified in two types - arabica and robusta. Arabian coffees, which make up
the bulk of world production, are grown mainly in
the tropical highlands of the Western Hemisphere.
Robusta coffees are produced largely in the low, hot
areas of Africa and Asia. Their flavors are less
mild than the arabica coffees.
South and Central America produce the majority of
coffee trade in world commerce. Brazil and Colombia
are
the largest growers of arabica coffees. The top two
robusta producers are Vietnam and Indonesia. Seventy
countries produce coffee and 45 of those produce 97%
of the world production. In the United States only Puerto Rico and Hawaii
produce any significant amounts of coffee.
The supply of coffee is affected by weather
conditions, the health of the coffee trees, and
harvesting practices which in turn moves coffee futures prices.
Coffee Demand
The demand for coffee is primarily determined by its
price, the price and availability of substitute
drinks and consumer's tastes. In periods of normal
price variations, the demand for coffee is price
inelastic. This means that when coffee futures prices rise,
people do not reduce their coffee consumption
proportionally, and when coffee futures prices fall,
consumer demand for coffee does not proportionally
increase to any great extent.
In
the United States, over the last 30 years, per
capita coffee consumption has declined considerably
and limited population growth has led total
consumption to even out over the past decade.
Although high coffee futures prices were primarily
responsible for the 1976-77 cutback in per capita
coffee consumption, some studies attribute the
longer-term decline mostly to changing tastes and
very little to price changes. There is some evidence
to suggest that changing American lifestyles have
enabled soft drinks to compete with coffee as a
social drink.
The Role of the Exchange and
Coffee Futures
The (ICE) is the world's
premier forum for coffee futures and coffee options
trading.
As
an exchange, the (ICE) does not participate in coffee
futures price determination. Rather, it provides a visible,
free-market setting where members can conduct
coffee futures and options transactions subject to Exchange
rules and regulations. Since all coffee futures and options
contracts are standardized (with delivery months and
locations, quantity and grade constant), only price
is negotiable. The exchange environment allows
prices to reach their natural levels - an important
economic function known as price discovery.
Market participants are comprised of two main
groups: hedgers and investors. Hedgers are primarily
commercial firms that trade coffee futures and options to
reduce their risk to unfavorable price movements in
the physical markets. Hedging with coffee futures allows
firms to lock in prices for future purchases or
sales assisting in business planning and smoothing
operations. Coffee options hedging provides the ability to
manage risk in many different market environments by
paying premiums for price protection or earning
income through coffee option sales to augment marketing
opportunities. Traditionally, hedgers have included
coffee producers, importers and roasters.
Hedgers and investors are joined in the market by
floor traders - independent, professional traders
who trade for their own accounts. Floor traders add
liquidity to the market, increasing efficiency and
facilitating commercial hedging and individual
investment objectives.
Trading Coffee Futures
A
coffee 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 at an agreed upon price. A
contract buyer is obligated to take delivery of
coffee 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 coffee futures contract.
The vast majority of coffee futures contracts never result
in actual making or taking delivery. Instead,
contract holders liquidate their positions by
executing offsetting transactions in the market.
Longs sell the contracts they bought and shorts buy
their contracts back, removing delivery obligations.
Margin for Coffee Futures
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 that
market participants will meet their contractual
financial obligations.
Leverage
A
major attraction of coffee futures trading for investors is
leverage. Since futures transactions do not require
full advance payments for the commodity (just the
margin), the buyer of a coffee futures contract which
increases in value (or the seller of coffee 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 coffee futures contracts (each representing
37,500 pounds of coffee) with a $3,000 margin
deposit. Thus, if the investor bought one contract
at 150.00 cents/pound ($56,250 worth of coffee) and
sold the contract when coffee reached 165.00
cents/pound, he would realize a profit of $5,625
(15.00 cents x 37,500 pounds = $5,625) - a 187.5%
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
coffee prices were to move opposite from the
anticipated direction, an investor could lose the
entire margin deposit and more.
Trading Coffee Future Options
With its launch of options on world sugar futures in
1982, the CSCE became the first Exchange to trade
options on commodity futures. In 1986, options on
coffee futures commenced trading. Because coffee option
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, coffee options volume has grown
considerably. Learn More >>>
Buyers
Coffee option buyers obtain the right, but not the
obligation to enter the underlying coffee futures market at
a pre-determined price within a specified 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 pre-determined
price is known as the "strike" or "exercise" price,
the last day when an option may be exercised is the
"expiration date". Buyers pay sellers a premium for
their option rights.
Because a coffee option holder is under no obligation to
enter the coffee futures market, losses are strictly
limited to the purchase value: there are no margin
calls. If the underlying 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 futures hedge,
where gains in the cash market are offset by coffee futures
market losses.
Coffee option holders can exit their position in one of
three ways: exercising the option and entering the
coffee futures market; selling the option back in the
market; or simply letting the option expire
worthless.
Sellers
Coffee 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 coffee 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 coffee 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 coffee futures market at any time upon exercise,
they are required to maintain a margin account
similar to that for coffee futures. Sellers can offset
their positions by buying back their option in the
market.
Strike Price
Traders agree on premiums in an open outcry auction
similar to that for coffee futures contracts. The Exchange
generally lists thirteen strike prices for each
option month: one at or near the futures price, six
above and six 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 option premium levels in the market. "Intrinsic value" is the dollars and cents
difference between the option strike price and the
current coffee 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 futures prices for
calls, below for puts). "At-the-money" options have
strike prices at or very near coffee 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 buyers' anticipation that, at some point
prior to expiration, a change in the coffee 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 coffee 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 Months
Coffee options are traded on coffee 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 option actually expires.
In
general, the last trading day for coffee options is
the first Friday of the month preceding the coffee futures
contract delivery month.
Example: Buying a Coffee Call Option
Buying a call can be employed to profit from, or
achieve protection against, an increase in the price
of coffee. Except for the cost of the option, the
profit potential is similar to having a long
position in the underlying coffee 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 you cannot
lose more than the premium paid for the option, plus
commission and fees.
For example, assume in July an investor foresees
higher coffee prices by winter's onset. With
December futures trading at 150.00 cents/pound, the
investor decides to purchase a December 150 call (an
at-the-money option) for 5.25 cents/pound. Since
each contract represents 37,500 pounds of coffee,
the total premium paid is $1,968.75.
The maximum loss the investor can incur is the
premium paid, regardless of how far futures prices
fall. However, potential profit is unlimited since
the option holder gains dollar-for-dollar in the
rise of the underlying coffee 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 price to expire unexercised.
Example: Buying a Coffee Put Options
Whereas buyers of calls can profit from rising
prices, buyers of put options - rights to sell
coffee futures contracts at the option exercise price - can
profit from a price decline. Except for this
difference, the properties of puts and calls are the
same.
To
realize a profit 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 all of the premium
will be lost. In no case, can losses exceed the
premium paid.
For example, the investor in February expecting
depressed coffee prices during the summer can
purchase July puts. With July futures trading at
156.00 cents/pound, the investor purchases a July
155 put for 15.00 cents/pound (15.00 cents x 37,500
pounds = $5,625.00/contract)
The investor can lose no more than the premium paid,
no matter how high coffee futures prices climb. On the
other hand, if prices decline, the investor can
realize substantial gains. A 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
coffee futures position 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 a July 155 put would cost 7.70 cents/pound and a
165 put 12.10 cents/pound in April when coffee futures were
trading at 164.50 cents/pound. The 155 put would
provide 10.00 cents/pound less protection than the
165 put, but could be obtained at a lower cost.
ICE Coffee Futures Contract
Calls for delivery of washed arabica coffee produced
in several Central and South American, Asian, and
African countries, or unwashed arabica coffee of
Ethiopia.
Trading Units:
37,500lbs. (approximately 250 bags)
Trading Hours:
3:30 A.M. to 2:00 P.M. New York Time (verify with exchange)
Price Quotation:
Cents per pound
Delivery Months:
March, May, July, September, December
Ticker Symbol:
KC
Minimum Fluctuation:
5/100 cent/pound, equivalent to $18.75 per contract.
Daily Price Limits (from previous day's settlement
price): 6.00 cents with variable limits effective under certain
conditions. No price limits on two nearby months.
Coffee Options Contract
Confers to buyer the right to buy (in the case of a
call) or sell (in the case of a put) one coffee "C"
futures contract.
Trading Unit:
One coffee "C" futures contract
Trading Hours:
9:15A.M. New York Time until the completion of the
closing period which shall commence at 12:30P.M. (verify with exchange)
Price Quotation:
Cents per pound
Contract Months:
"Regular Options": March, May, July, September,
December; "Serial Options": January, February,
April, June, August, October, November
Ticker Symbol:
KC
Minimum Fluctuation:
1/100 cent/pound, equivalent to $3.75 per contract.
Daily Price Limits:
None
**Click Here Now!
for actual futures and options prices, expirations, charts .....
To see other soft commodity contracts visit
cocoa futures ,orange juice
futures ,cotton futures and
sugar futures.
For specific future trading information visit
commodity research and
future market research.
SITE MAP
|
