What Is Orange Juice Trading?

Orange juice trading has develop into popular globally, and trading volumes proceed to extend. Being certainly one of the world’s hottest fruit juices, orange juice trading attracts various market participants, including farmers, processors, storage houses, market makers, and arbitrageurs. 

Multiple financial instruments, like futures and options, can be found for trading orange juice. A futures contract is a legal obligation to purchase or sell a commodity at a predetermined price for delivery on a particular date in the longer term. Futures contracts trade on a futures exchange and are standardized, meaning they’ve set amounts and delivery dates.

However, an option contract gives the holder the best (but not the duty) to purchase or sell the underlying asset at a particular price (called a strike price) on or before the contract’s expiration date (called the expiry).

This text discusses options trading on orange juice contracts, trading scenarios, orange juice trading markets, participant profiles, risks, rewards, and the way the determining aspects impact option prices for orange juice trading. Orange juice options on ICE futures exchange are taken as examples cited throughout the article.

What Is an Orange Juice Options Contract?

Soft commodities are actually finding a spot in investment portfolios of market participants as an alternate class of tradable securities. Soft commodities are typically agricultural products which are bought and sold via standardized contracts on commodities exchanges. Examples of sentimental commodities include:

• Cotton
• Cocoa
• Coffee
• Rice
• Sugar
• Wheat
• Orange juice

Lack of storage and processing capabilities before 1950 restricted orange juice to what was called a same-day consumption commodity or a perishable commodity. Within the Fifties, the orange juice industry was revolutionized by the event of frozen concentrated orange juice (FCOJ). Through processing, freezing, and flavoring agents, orange juice became the world’s favorite fruit drink and the commodity that it’s today.

In orange juice options trading, the underlying asset is one FCOJ-A futures contract. One such futures contract is price 15,000 kilos of concentrated orange juice solids. Because of this if an orange juice option contract expires in-the-money (ITM), the client of the orange juice call or put option will get the best to enter into a protracted (buy) or short (sell) orange juice futures contract.

The contract owner can take certainly one of several actions: trade (sell/buy) the futures contract, exchange the contract for physical orange juice or roll over the contract to the subsequent term futures contract.

Using Orange Juice Options for Hedging

While market-making, arbitrage, and speculation proceed to stay the guts of commodity trading, hedging is the first purpose for which so many products proceed to get enabled for trading on leading global exchanges. Hedging is achieved by derivative products like futures and options that producers and consumers can efficiently use to attain risk management.

Put Option Hedge

Assume it’s January, and frozen concentrated orange juice is currently trading at 135 cents/pound (the spot price). An orange farmer expects his crop (1 unit of FCOJ, or 15,000 kilos) to be ready on the market by June (in six months). The farmer is nervous a few price drop in oranges within the near future, so he wishes to secure the minimum sale price of oranges (to say around 130 cents/pound) for when his crop is prepared. The farmer is on the lookout for a hedge or price protection on his crop. To do that, he should purchase one orange juice put option contract.

A put option gives the farmer the best to sell the underlying asset at a specified sell (or strike) price inside a particular timeframe. The orange farmer selects the choice contract with a strike price of 135 cents and the expiry in June, which is when his crop can be ready. He pays an upfront option premium of 4 cents per pound (4 cents X 15,000 kilos=$600).

Buying the put option will give the orange farmer the best, but not the duty, to take a brief position in a single orange juice futures contract on the predetermined price of 135 cents on the time of the choice’s expiry. This futures contract will give him the best to sell the oranges at this predetermined price (135 cents/pound X 15,000 kilos=$20,250). 

Price of Orange Juice: Below the Put Strike Price 

If the worth of orange juice declines to 110 cents per pound, the long orange juice put option will come in the cash. Because of this the strike price is higher than the market price, and due to this fact the choice is price money. The farmer will exercise the choice.

The farmer will get the short futures position at 135 cents. He’ll gain 25 cents/pound from the futures position (135 cents/pound – 110 cents/pound = 25 cents/pound). He paid the upfront option premium of 4 cents/pound taking his net profit to 21 cents per pound. He can sell his orange juice on the market price of 110 cents, taking the entire sale price to 110 + 21 = 131 cents/pound. For a 15,000 kilos contract, he’ll receive 15,000 * 131 cents = $19,650.

Price of Orange Juice: On the Put Strike Price

If the worth of orange juice stays around the identical levels (say at 133 cents) on the time of expiry, the choice will get exercised. He’ll get the short futures contract at 135 cents and may square it off at 133 cents, giving him a profit of two cents. He’ll sell his orange crop at market rates of 133 cents. Deducting the 4 cents he paid as option premium, his net sale price is 131 cents/pound (133 + 2 – 4 = 131 cents/pound). For a 15,000 kilos contract, he’ll receive $19,650.

Price of Orange Juice: Above the Put Strike Price

If the worth of orange juice rises to, say, 150 cents on the time of expiry, the choice will expire worthless (as the present price is higher than the strike price of the put option). The farmer is not going to have the ability to exercise the choice and is not going to get the short futures contract.

Nonetheless, he’ll have the ability to sell the orange crop at market rates of 150 cents per pound. Deducting the 4 cents he paid as option premium, his net sale price can be 146 cents/pound (higher than his expected level of 130 cents/pound). For a 15,000 kilos contract, he’ll receive $21,900.

Advantages of Orange Juice Put Options

Using a put option of orange juice contracts has provided the farmer with dual advantages in all of the possible scenarios. His risk is proscribed on the downside with a guarantee of a minimum price level (131 cents) Plus, he can profit from the upward price moves. This comes at the associated fee of the choice premium of 4 cents/pound.

Call Option Hedge

On the opposite side, allow us to consider an orange juice processor who must buy one frozen concentrated orange juice unit in six months. The present price of 1 unit of FCOJ is 135 cents. The processor is worried that orange prices may rise, so he desires to limit his purchase price to a maximum of about 140 cents/pound.

To achieve price protection, the processor should purchase one orange juice call option. She selects an option with a strike price of 135 cents and an expiry date of six months in the longer term. The upfront option premium cost is 4.5 cents per pound (4.5 cents X 15,000 kilos = $675). On the time of expiry, this call option, if in the cash, will give her the best to take a protracted orange juice futures position which she will be able to square off at existing market rates to lock the buy price. 

Price of Orange Juice: Below the Call Strike Price

If the worth of orange juice declines to 110 cents on the time of expiry, the choice will expire worthless (as the present price is lower than the strike price of a call option). The client is not going to have the ability to exercise the choice and is not going to get the long futures contract.

Nonetheless, she is going to have the ability to purchase the oranges on the market rate of 110 cents per pound. Adding the 4.5 cents per pound she paid as the decision option premium, her net buy price can be 114.5 cents per/pound (higher than his expected level of 140 cents/pound). His net cost can be 114.5 cents * 15,000 kilos = $17,175.

Price of Orange Juice: On the Call Strike Price

If the worth of orange juice stays around the identical levels (say at 137 cents/pound) on the time of expiry, the choice will get exercised (as the present price is higher than the decision option’s strike price).

The orange juice maker will get the long futures contract at a predetermined 135 cents and may square it off at 137 cents, giving her a profit of two cents/pound. She is going to buy her oranges at market rates of 137 cents. Deducting the 4.5 cents she paid as option premium, the web buy price is 134.5 cents/pound (137 + 2 – 4.5 = 134.5 cents). His net cost can be 134.5 cents * 15,000 kilos = $20,175.

Price of Orange Juice: Above the Call Strike Price

If the worth of orange juice increases to, say, 150 cents/pound, the long orange juice call option will are available in the cash and can be exercised. The client will get the long futures position at 135 cents. She will square it off on the converging price of 150 cents, as gaining (150 – 135) = 15 cents from the futures position.

She paid the upfront option premium of 4.5 cents, taking net profit to 10.5 cents/pound. She should purchase oranges on the market price of 150 cents, taking the entire buy price to 139.5 cents/pound (150 – 10.5 = 139.5 cents/pound). His net cost can be 139.5 cents * 15,000 kilos = $20,925.

Advantages of Orange Juice Call Options

On this case, using orange juice options guarantees a maximum capped buy price in all scenarios, with the good thing about lower buy price in case of market price declines. By paying a fraction of the associated fee in the shape of an option premium, the producer and consumer can effectively protect the downside risk and yet keep the upward profit or saving potential high.

Aside from hedging scenarios, traders actively make speculative bets on orange juice contracts to profit from price changes and arbitrage opportunities. Market Makers also make a crucial contribution by offering sufficient liquidity and tight spreads in the choices market.

Orange Juice Options vs. Orange Juice Futures

Ideally, either futures or options will be used for hedging, speculation, or arbitrage. Nonetheless, a transparent advantage long options have over futures is that long option positions don’t need margin money or a each day mark-to-market like futures. This convenience comes at the associated fee of a nonrefundable option premium being paid upfront and is susceptible to time decay. Short options do require margin capital.

Long options also limit the losses (capped to option premium paid), while futures have unlimited loss potential on each long and short positions.

The Orange Juice Options Trading Market

Futures trading in frozen concentrated orange juice began in 1945 and is claimed to be certainly one of the explanations for oranges taking certainly one of the highest spots in U.S. crops. Currently, frozen concentrated orange juice futures contracts trade on the ICE exchange. The physical settlement of 1 contract equal to fifteen,000 kilos of orange solids is finished through delivery in drums or tanks. Allowed countries of origin for oranges are the US, Brazil, Costa Rica, and Mexico.

Brazil tops the orange-producing nation’s list, followed by China after which the US as of 2021. These three countries are probably the most influential markets for determining international orange prices. For the 2019-20 growing 12 months, around 55 percent of U.S. oranges come from Florida, where the crop is liable to extreme weather events like hurricanes or unexpected cold snaps that may wipe out your complete season’s crop.

The concentration of many of the crop in a single location and the chances of utmost weather events and similar conditions in Brazil have led to high uncertainty and hence high volatility in orange prices. This volatility is reflected in orange options valuations.

Such various volatility results in high volatility skew, which makes orange juice option contracts suitable to trade ratio spreads. Ratio spreads using options fit those instruments, which have high volatility skew (i.e., high levels of variations in volatility between ITM, ATM, and OTM options). 

The ICE Exchange has FCOJ A options available for trading across the cities of Recent York, London, and Singapore, ideally covering all geographical locations across APAC, Europe, and the US in the course of the 24-hour cycle.

What Impacts Orange Prices and Options Valuations?

Any agricultural commodity is affected by weather and disease. Oranges aren’t any exception. In actual fact, most oranges for orange juice are grown in three locations, Florida, Mexico, and Brazil. Because of this an extreme weather or disease event in a single location can disturb and even destroy an enormous amount of world FCOJ supply. Hurricanes and unseasonable freezing and frosts impact these areas. Brazil also suffers from droughts from May to June, which may affect the orange crop. These weather events impact the orange crop, which impacts FCOJ prices and options prices.

Orange juice options traders must pay close attention to seasons and weather forecasts. Hurricane forecasts may end up in steep price rises as traders anticipate damage to the orange crop. Once the hurricane passes, prices will adjust to reflect the actual damage suffered by the crop. In anticipation of the winter freeze damaging the orange crop and reducing supply, prices often go up in November. This price spike can reverse in December and January once the extent of freeze damage becomes evident. The ICE exchange report  provides the next illustration:

Traders must also pay attention to how changes in consumption habits can affect orange juice prices. A rise in consumption within the country where the oranges are grown could reduce the export supply. Consumers could stop viewing orange juice as a health drink and move on to other beverages, as has been happening in the US. The reduction in consumption can result in price declines.

Government policies, local labor laws, and international trade developments can impact orange production and provide. The orange and orange juice demand and provide report from the U.S. Department of Agriculture covers estimates across all orange-producing regions in the US and abroad. Orange juice options traders must also follow related news items specific to orange juice trading from the favored market and news data providers.

To trade orange juice options, one needs a commodity trading account with regulated brokers who’ve authorized membership with the respective exchange.

The Bottom Line

Interest and diversification requirements have led to traders looking beyond the bizarre security classes of equities, bonds, and plain-vanilla commodities. Orange juice has been a highly volatile soft commodity lately, making it a high-risk trading asset.

Aside from the above-listed aspects that affect the orange spot prices, orange juice option trading can be impacted by aspects specific to option pricing models—exercise or strike price, time to expiry, risk-free rate of return (rate of interest), and volatility.

Orange juice option traders should pay attention to these dependencies. Trading orange juice options is advisable only for skilled traders who’ve sufficient knowledge in options trading.