Rice put options give a buyer exposure to falling futures prices. Follow one contract from premium paid to its result at expiration.
How rice options work
The examples use options on rough rice 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 rice grower may use puts to protect against falling rough-rice prices. A buyer of milled rice has additional processing and quality exposure.
The cost of one option
One CBOT contract represents 2,000 hundredweights. At a premium of $0.5 per hundredweight, one option costs $1,000 ($0.5 × 2,000).
Assume the futures price and strike are both $15 per hundredweight. The call and put premiums are each $0.5 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 rice puts
If you expect prices to fall instead, buying one $15 put costs $1,000 in this example.
At a futures price of $13.5 per hundredweight, selling at the strike gives an advantage of $1.5 per hundredweight. The option is worth $3,000 at expiration, leaving a $2,000 net profit after the premium.
At $15 or above, the put expires worthless. Breakeven is $14.5 per hundredweight. At $14.75, the price has fallen, but the put still loses $500: 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.
Rice price chart
CBOT rough rice. 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 Rice chart on TradingView.
