Strike Prices, Options, Volatility

Question 1

If I buy an option to buy one contract of March raw sugar on the ICE am I long or short?

Answer 1

Long.

Question 2

When does a contract of match sugar expire?

Answer 2

Mid February

Question 3

If the strike price was twenty cents per pound at a premium (price) of 0.2 cents per pound—and by the time the option expires in mid-February, the price of the underlying futures had increased to twenty-five cents per pound, what would I do?

Answer 3

exercise my right to buy the one futures contract at the previously agreed strike price of twenty cents per pound, and I could then sell out one futures contract at twenty-five cents per pound, locking in a profit of five cents per pound.

Question 4

When are you short of the option?

Answer 4

If you sold the option to me

Question 5

What do I do if the price the price falls to fifteen cents per pound by the time the option expired.

Answer 5

I would only be able to sell it at fifteen cents per pound, locking in a loss of five cents per pound. I obviously would not want to do that, so I let the option contract expire worthless, without exercising it. The seller would have no obligation to do anything and would end up keeping the original premium of 0.20 cents per pound as his profit.

Question 6

What do I do if I’m long and the underlying futures had risen to twenty-five cents per pound way in advance of the option expiry date.

Answer 6

I would want to take my profit on the margin without waiting for it expire esp if I thought prices would fall again - I would sell it to someone else

Question 7

How much will my option be worth when I try and sell it to someone

Answer 7

However much they are willing to pay but also three things:intrinsic value, its time value, and the price volatility of the under-lying asset.