Selling (Going Short) Sugar Futures to Profit from a Fall in Sugar Prices

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Contents

Selling (Going Short) Sugar Futures to Profit from a Fall in Sugar Prices

If you are bearish on sugar, you can profit from a fall in sugar price by taking up a short position in the sugar futures market. You can do so by selling (shorting) one or more sugar futures contracts at a futures exchange.

Example: Short Sugar Futures Trade

You decide to go short one near-month Euronext Raw Sugar (No. 408) Futures contract at the price of USD 0.1111/lb. Since each Raw Sugar (No. 408) futures contract represents 112000 pounds of sugar, the value of the contract is USD 12,443. To enter the short futures position, you have to put up an initial margin of USD 1,456.

A week later, the price of sugar falls and correspondingly, the price of Euronext Raw Sugar (No. 408) futures drops to USD 0.1000 per pound. Each contract is now worth only USD 11,199. So by closing out your futures position now, you can exit your short position in Raw Sugar (No. 408) Futures with a profit of USD 1,244.

Short Sugar Futures Strategy: Sell HIGH, Buy LOW
SELL 112000 pounds of sugar at USD 0.1111/lb USD 12,443
BUY 112000 pounds of sugar at USD 0.1000/lb USD 11,199
Profit USD 1,244
Investment (Initial Margin) USD 1,456
Return on Investment 85.4615%

Margin Requirements & Leverage

In the examples shown above, although sugar prices have moved by only 10%, the ROI generated is 0.0000%. This leverage is made possible by the relatively low margin (approximately 11.7012%) required to control a large amount of sugar represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

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Writing Puts to Purchase Stocks

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Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

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Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying (Going Long) Sugar Futures to Profit from a Rise in Sugar Prices

If you are bullish on sugar, you can profit from a rise in sugar price by taking up a long position in the sugar futures market. You can do so by buying (going long) one or more sugar futures contracts at a futures exchange.

Example: Long Sugar Futures Trade

You decide to go long one near-month Euronext Raw Sugar (No. 408) Futures contract at the price of USD 0.1111 per pound. Since each Euronext Raw Sugar (No. 408) Futures contract represents 112000 pounds of sugar, the value of the futures contract is USD 12,443. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 1,456 to open the long futures position.

Assuming that a week later, the price of sugar rises and correspondingly, the price of sugar futures jumps to USD 0.1222 per pound. Each contract is now worth USD 13,688. So by selling your futures contract now, you can exit your long position in sugar futures with a profit of USD 1,244.

Long Sugar Futures Strategy: Buy LOW, Sell HIGH
BUY 112000 pounds of sugar at USD 0.1111/lb USD 12,443
SELL 112000 pounds of sugar at USD 0.1222/lb USD 13,688
Profit USD 1,244
Investment (Initial Margin) USD 1,456
Return on Investment 85.4615%

Margin Requirements & Leverage

In the examples shown above, although sugar prices have moved by only 10%, the ROI generated is 85.4615%. This leverage is made possible by the relatively low margin (approximately 11.7012%) required to control a large amount of sugar represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

Learn More About Sugar Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

A complete guide to buying, selling and investing in sugar

Learn about sugar as a commodity; the factors driving prices and the different ways you can invest in it.

Last updated: 31 March 2020

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As with most commodities, there are a number of ways to invest in sugar, all with varying levels of risk.

How to invest in sugar

There are four main options to consider if you are investing in sugar:

1. Buy Sugar Futures

Futures are a legal agreement to buy or sell something, at a predetermined price, at a specified time in the future.The contracts are negotiated at futures exchanges, which act as a marketplace between buyers and sellers.

There are various exchanges that offer contracts on sugar including The New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME), and the Intercontinental Exchange (ICE).

A benchmark in the raw sugar trade, and the most common sugar contract, is Sugar No. 11. A futures contract for the physical delivery of raw cane sugar. Futures contracts are standardised, meaning one Sugar No.11 contract always represents 112,000 pounds of raw centrifugal cane sugar based on 96 degrees average polarisation.

Futures can be extremely volatile and are riskier than other investment options. You have to be right on the timing and price movement.

  • All futures contracts are standardised, eliminating concerns about the quality and quantity of the underlying commodity.
  • Futures can be extremely volatile and are riskier than other investment options. You have to be right on the timing and price movement.
  • Futures expire on a certain date. If you fail to exercise them prior to expiry they become worthless.

2. Buy Sugar Options on Futures

An options contract is an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later date at an agreed upon price.

There are two main benefits to options. Firstly, you are limiting your loss. You cannot lose more than you paid for the option, excluding brokerage costs. So, if you are wrong on the move of the price of sugar, your loss is only what you paid for the option. Secondly, options are usually far less expensive than buying the futures contract outright.

The International Exchange (ICE) offers an options contract on sugar futures.

  • Less risky than sugar futures.
  • Usually much cheaper than futures.
  • Options on futures have expiration dates.

3. Sugar ETFs

ETFs are another option worth considering. ETFs trade as shares on exchanges the same way that stocks do. They give access to a whole load of assets, without having to put all of your money into one or two firms. If you need to brush up on ETFs, check out our guide.

ETFs allow investors to minimise risk, while taking advantage of the performance and general popularity of a particular sector.

There are three popular ETFs that invest in Sugar No. 11 futures: iPath Dow jones-USB Sugar Total Return Sub-Index ETN, Teucrium Sugar Fund and iPath Pure Beta Sugar ETN.

  • ETFs allow portfolio diversification and risk management.
  • Lower costs than open-end mutual funds.
  • By placing your money in an ETF, you are trusting your portfolio to a robo—adviser meaning you relinquish some control over the split of assets.

4. Buy Shares of Sugar Companies

When it comes to sugar stocks and shares, there are two names to keep in mind: Imperial Sugar Company and Alexander & Baldwin (NYSE:ALEX)

  • You can pick and choose a range of stocks and cash out when you want.
  • A simple, accessible and versatile way to access the market.
  • Can mean putting all your eggs in one basket.

Compare these providers for access to sugar ETFs and more

What are the factors driving the price of sugar?

Sugar is a volatile commodity, meaning investing could come with substantial gains or losses. This is largely due to the number of factors that impact the price of sugar. These include:

  • Global supply and demand: If farmers expect higher demand they will plant more crops and when weaker demand is expected, they will plant fewer crops. If global demand exceeds or falls short of sugar supplies, prices are affected accordingly.
  • The Brazilian Real: Fluctuations in brazil’s currency can majorly impact sugar prices. When the real is weak, Brazilian farmers produce more sugar for export to countries with strong currencies and greater purchasing power. When the real is strong, Brazilian farmers are more likely to sell in the local market. A weak real means greater supply on global markets and lower prices.
  • Government Subsidies: Government subsidies and tariffs are used to protect local sugar producers. These distort the market, creating artificially high supply and depressing prices.
  • The Weather: Poor weather conditions can affect crops and reduce supply.
  • Health concerns: Health risks have left governments under pressure to take action against high obesity rates. This could mean sugar taxes or restrictions, leading to a decline in consumption and fall in prices.
  • Ethanol Demand: Sugar can be used to make ethanol, ethanol competes with gasoline as a fuel source. Thus, a fall in oil prices could depress sugar demand for ethanol while an increase in oil prices would mean higher demand for sugar.

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