Ethanol call options give a buyer exposure to rising futures prices. Follow one contract from premium paid to its result at expiration.
How ethanol options work
The examples use options on denatured fuel ethanol 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 fuel blender may use ethanol calls to manage purchase costs. These examples use the newer NYMEX contract, not the legacy CBOT ethanol contract.
The cost of one option
One NYMEX contract represents 42,000 gallons. At a premium of $0.1 per gallon, one option costs $4,200 ($0.1 × 42,000).
Assume the futures price and strike are both $2 per gallon. 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 ethanol calls
Suppose you expect ethanol prices to rise and buy one $2 call for $4,200.
If the underlying future reaches $2.3 per gallon at expiration, buying at $2 gives an advantage of $0.3 per gallon. Across 42,000 units, that is $12,600. After the premium, your net profit is $8,400.
At $2 or below, the call expires worthless and the loss is $4,200. Breakeven is $2.1 per gallon: strike plus premium. At $2.05, the call has value but still loses $2,100 after its cost.
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.
Ethanol price chart
Current NYMEX EL ethanol, not the delisted CBOT EH contract used in older examples. A continuous futures chart joins contract months; it is not an individual expiry. Check the displayed quotation and timestamp.
This market is not available in the embedded chart. Open the Ethanol chart on TradingView.
