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Trading Coffee Options
The second most highly traded commodity in the world next to crude oil is coffee. Trading coffee options can be profitable but requires a unique skill set. Investopedia writes about the perks of trading coffee options.
“Soft commodities,” which include cotton, cocoa, coffee, and sugar, are appearing in portfolios as an alternate class of trading assets. Though many other agricultural produce like orange juice, sugar, and cotton enjoy the benefit of subsidies at the regional, national, and international levels, facilitating their trade, coffee production and export do not enjoy the same number of subsidizations for international trade. So while it is the world’s favorite drink, coffee is challenging to trade and price.
Coffee futures have been in existence since 1882 on the New York Cocoa Exchange. The present day center for futures and options trading for coffee contracts is the ICE Futures US exchange.
While other popular options (that have stocks or indices as the underlying) allow the option buyer to (theoretically) purchase the underlying stock, coffee options have coffee futures as their underlying. Exercising an in-the-money (ITM) coffee call/put option leads the buyer to a long/short coffee futures contract, which he can then square off at market price or rollover as desired.
Coffee prices are driven by supply and demand. The drought in Brazil drove prices up as Brazil produces forty percent of the Arabica coffee in the world. Trading coffee options often has to do with being a Central and South American weather forecaster.
Drought in Brazil
Brazil has been experiencing a devastating drought. It has not been this dry in the largest country in South American for nearly 100 years. National Geographic provides insight.
In São Paulo, Brazil, which is suffering its worst drought in almost a century, Maria de Fátima dos Santos has lived for days at a time with no water, relying on what she had carefully hoarded in bottles.
But in the Bolivian Amazon, about 1,800 miles (2,897 kilometers) away, Nicolás Cartagena recalls the day almost a year ago when floodwaters rose to the thatched rooftops of Indian communities, destroying crops and washing away homes.
The drought in South America’s biggest city and the flooding in the Amazon are being triggered by the same wind-driven weather phenomenon that scientists say is probably a harbinger for more extreme water shortages and flooding across the continent.
No one fully understands this boom-and-bust cycle, but meteorologist José Marengo says it has been triggered by a sprawling high-pressure system that settled stubbornly over southeastern Brazil. That region is usually at the end of a long loop of moisture-bearing trade winds. Last year, however, this system went awry.