Coffee options let a buyer take a view on price changes while paying a premium for a limited period. A call offers exposure to a rise; a put offers exposure to a fall. The size of the move and the premium determine whether the buyer makes money.
How coffee options work
The examples use options on Coffee C Arabica futures. A call gives the right to enter a long futures position at the strike price. A put gives the right to enter a short futures position at that price.
A roaster using Arabica may buy Coffee C calls. A Robusta contract is not an exact hedge for Arabica purchases.
The cost of one option
One ICE Futures U.S. contract represents 37,500 pounds. The exchange quotes this product in cents per pound; the examples convert those quotes into dollars. A premium of 10 cents equals $0.1 per pound. At a premium of $0.1 per pound, one option costs $3,750 ($0.1 × 37,500).
Assume the futures price and strike are both $2 per pound. The call and put premiums are each $0.1 for comparison, not current quotes. Results below are at expiration, before fees, with any futures position from exercise immediately closed at the stated price.
Buying coffee calls
Suppose you expect coffee prices to rise and buy one $2 call for $3,750.
If the underlying future reaches $2.3 per pound at expiration, buying at $2 gives an advantage of $0.3 per pound. Across 37,500 units, that is $11,250. After the premium, your net profit is $7,500.
At $2 or below, the call expires worthless and the loss is $3,750. Breakeven is $2.1 per pound: strike plus premium. At $2.05, the call has value but still loses $1,875 after its cost.
Buying coffee puts
If you expect prices to fall instead, buying one $2 put costs $3,750 in this example.
At a futures price of $1.7 per pound, selling at the strike gives an advantage of $0.3 per pound. The option is worth $11,250 at expiration, leaving a $7,500 net profit after the premium.
At $2 or above, the put expires worthless. Breakeven is $1.9 per pound. At $1.95, the price has fallen, but the put still loses $1,875: the move has not covered its premium.
Before expiration
An option can be sold to close before expiration when a market is available. Its price then includes the effect of remaining time and implied volatility, so an earlier trade need not break even at the expiration price calculated above.
The purchased option can lose its whole premium. Exercise can create a futures position requiring margin and exposing you to further gains or losses. An uncovered seller can lose more than the premium received.
Coffee price chart
Capital.com US Arabica Coffee CFD reference price. This broker CFD (contract for difference) is a market reference, not a spot price or an exchange futures contract. This is the US Arabica reference, not London Robusta. Prices and quoting units may differ from the contracts described in this guide. Check the widget timestamp and market status; prices may be delayed.
