Buying Cocoa Put Options to Profit from a Fall in Cocoa Prices

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Cocoa Futures Live Chart. Price Online, Forecasts and Analysis

Cocoa Futures Live and Historical Chart

09.04.2020 – COCOA is trading without changes today. The price increased 1.22% to 2346.0000 from previous day. During the last trading session Cocoa Futures gained 0% or 0 (0 points) to 0.

Historical data: the maximum COCOA price was 5379.0000 in 1977 year and the minimum price was 674.0000 in 2000 year. The highest monthly gain was 38.19% on March 1974 and biggest drop was 28.08% on May 2003.

Cocoa Trading: A High Risk High Return Commodity Worth Considering In 2020

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Last Updated on August 18, 2020

3 Reasons You Might Invest in Cocoa

Investors purchase agricultural commodities such as cocoa for a variety of reasons, but the following are most common:

  1. Speculation
  2. Bet on Growing Demand
  3. Portfolio Diversification

Can You Speculate on the Price of Cocoa?

Most cocoa production occurs in a few countries in Western Africa.

Weather and local politics play a big role in creating and alleviating supply bottlenecks.

Cocoa prices can be very volatile. Investors looking to speculate on short-term bottlenecks in supply might see cocoa as an attractive investment.

Is Cocoa a Bet on Growing Demand?

There are many reasons to expect cocoa demand to grow strongly in the years and decades ahead.

  1. Emerging market countries are getting wealthier and adopting Western dietary customs. Chocolate is a luxury item that could see great demand as these countries get richer.
  2. Dark chocolate is considered a health food. It is rich in antioxidants, lowers cholesterol and protects against cancers. As healthy eating habits become more prevalent worldwide, cocoa demand could grow sharply.
  3. Western taste for chocolate is growing. Whether it’s the perceived health benefits of dark chocolate or the sweet tooth of consumers, chocolate consumption in mature Western economies shows no signs of slowing down. Growth in demand in Europe and North America could push cocoa prices higher.

Diversifying Your Portfolio

Commodities such as cocoa provide portfolio diversification to traders. They generally have low correlation with other financial assets and offer protection during inflationary periods.

Should I Invest in Cocoa?

Cocoa prices can be very volatile, so investing in the commodity could produce big gains or big losses.

Investing in cocoa can be more than just a speculative play on a supply shortage. An investment in cocoa is a way to diversify the assets in a portfolio away from financial products and into commodities.

A basket of commodities that includes cocoa, other soft commodities, metals and energy could mitigate overall portfolio risk and provide protection during times of inflation.

Investing in cocoa is also a way to profit from 3 long-term trends:

  1. Growing wealth in emerging markets could boost cocoa consumption.
  2. Global warming trends could damage the long-term production of cocoa trees and lead to supply shocks.
  3. Health-conscious consumers might increase their consumption of dark chocolate in the years ahead. Chocolate is unusual among health foods in that most people enjoy its taste.

Cocoa traders should also consider the risks involved in investing:

  1. Global concerns about obesity could curtail demand. Although dark chocolate has health benefits, it also has a very high fat content. Milk chocolate has both high amounts of sugar and fat.
  2. Strength in the British pound could lower cocoa prices in some markets.
  3. Oversupply of cocoa could put pressure on prices. If Western African cocoa-producing countries attain political stability and upgrade manufacturing facilities, cocoa production could increase and prices fall.
  4. Cocoa is a volatile commodity that could move lower without any specific catalyst.

What Do the Experts Think About Cocoa?

Experts see reasons for pessimism about cocoa prices in the short term, but they also see a favorable long-term backdrop for the commodity.

Ideal weather conditions in Western Africa may lead to bumper crops for the commodity in the near-term.

…weather conditions are seen to be improving, fueling the selloff.

– Wilfred Chong, Phillip Futures commodities dealer

Other analysts point to waning consumer demand as the culprit for weak prices going forward.

Whilst consumers are still looking to indulge, they are also increasingly concerned with eating better.

However, despite his concern about the supply overhang on cocoa from the weather, Chong sees a reason to be optimistic about the long-term prospects for cocoa.

There may be a rising number of health conscious individuals but there is also a growing popularity over health benefits of cacao and cocoa. Such trends take a much longer period to make a significant difference.

– Wilfred Chong, Phillip Futures commodities dealer

How Can I Invest in Cocoa?

Cocoa traders have several ways to invest in the commodity:

Cocoa Trading Methods Compared

Leverage? Regulated Exchange? Cocoa Futures 5 N N Y N Y Y Cocoa Options 5 N N Y N Y Y Cocoa ETFs 2 N N N Y N Y Cocoa CFDs 3 N N N N Y Y

Cocoa Futures

The New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME), and the Intercontinental Exchange (ICE) offer a contract on cocoa that settles into 10 metric tons of the commodity.

The CME contract trades globally on the CME Globex electronic trading platform and has expiration months of March, May, July, September and December.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are financially settled on the NYMEX, but physically settled on the ICE.

Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Cocoa Options on Futures

Both the CME and ICE offer an options contract on cocoa futures. The CME contracts are options on the physically delivered cocoa futures contract that trades on the CME Europe exchange. The ICE contracts are options on its physically delivered cocoa futures contract.

Options are a derivative instrument that employ leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of cocoa futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in cocoa futures to profit from their trades.

Cocoa ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do. There are two ETFs that invest in cocoa futures:

Top 2 Cocoa ETFs

Shares of Cocoa Companies

There are no pure-play global public companies engaged in the production and sale of cocoa. Some chocolate manufacturers such as Hershey Co. (NYSE: HSY) invest in cocoa futures to offset their risk from higher cocoa prices. While Hershey may be able to pass some cocoa price increases to consumers, ultimately higher prices hurt its profits.

Cocoa CFDs

One way to invest in cocoa is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of cocoa. The value of a CFD is the difference between the price of the shares at the time of purchase and the current price.

www.plus500.com (76.4% of retail CFD accounts lose money.)

Many regulated brokers worldwide offer CFDs on cocoa. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that traders can have exposure to cocoa prices without having to purchase shares, ETFs, futures or options.

One of the leading CFD brokers for trading agricultural commodities, like cocoa, is Plus 500. Here’s why:

  • No commission on trades (other charges may apply)
  • Free demo account
  • Easy to use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade cocoa and hundreds of other markets
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Start Trading at Plus500.com Important: Your capital is at risk. CFD services are suitable for experienced traders only.

One of the leading CFD brokers for trading agricultural commodity CFDs, like cocoa, is Plus 500. Here’s why:

  • No commission on trades (other charges may apply)
  • Free demo account
  • Easy to use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade cocoa and hundreds of other CFDs
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Why is buying a stock and buying a put option the same as buying a call option?

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I will try to answer your question without getting into the technical aspects.

You own a stock. You benefit from it if the price rises after you buy, you sell it at a higher price and book profit. But the markets do not work according to your wishes, and there is every chance that the stock price drops and you are making a loss. How do you avoid this?

Enter Put option.

A put option gives you a right, but not the obligation, to sell the stock at a particular price. So If you have bought the stock for $50 and you want to avoid making a loss, you buy a Put with a strike price of $50, which .

Michael Sincere’s Long-Term Trader

Michael Sincere

Five basic tips on how to use options for speculation or portfolio protection

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There are times when the stock market is in a big, beautiful bubble. During those times, it’s difficult to convince anyone to sell, or bet against it.

Why sell bitcoin BTCUSD, -1.06% at $10,000, for example, when it might potentially hit $20,000? Why sell the S&P 500 SPX, +3.40% at its all-time high right before Christmas? Are you crazy?

Often, there is no hard evidence that a market is in a bubble until after it pops. That is why common sense goes out the window during bubble-euphoria as the market reaches levels that seemed impossible only a few weeks before.

Whether the U.S. stock market is now in a bubble or not will be for the history books. Regardless, one strategy that most traders (and investors) should learn is how to buy and sell options. Those who don’t understand options believe it’s “a sucker’s bet.” It definitely is if you don’t know what you are doing.

“ Although you can lose money trading options, many options strategies are designed to reduce risk and protect stock portfolios. ”

If you are willing to learn, buying options is an excellent way to participate in the market’s rise or fall, and with limited risk. This does not mean no risk. Although you can lose money trading options, many options strategies are designed to reduce risk and protect stock portfolios.

There are dozens of fancy-sounding option strategies, but all options are based on buying and selling “calls” and “puts.” If you believe a stock or index will go up in value, you would buy calls on that security. If the market is forming a bubble, typically there is a final melt-up that brings in the last of the nonbelievers. Owning call options during this stage can bring great profits if you’re able to get out before the reversal — easier said than done.

Now, if you believe a stock or index will go down in value, you would buy puts on that security.

The risks of options trading

Options have a bad reputation because people misuse them. Typically, investors underestimate how quickly option prices fluctuate and how easy it is to lose money.

Unlike with stocks, when buying calls or puts you have to be right about the direction and the timing of the underlying stock or index price. When you buy calls or puts, the clock is always ticking. If you’re wrong about the direction of the stock or index within a specified time period, you could lose most or all of your initial investment. That is why buying calls and puts are a speculative trading strategy, and not for everyone.

If you want to reduce risk, there are a variety of options strategies designed to protect stock portfolios. Buying puts is the simplest of those strategies. If you own a portfolio of stocks, you will lose a lot of money when the market plunges. By owning put options, you can offset all or part of that loss. If you own enough puts, you can even earn an overall profit when stocks decline.

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Buying put options

If you believe the market or a stock has reached bubble levels, you might want to learn how to buy puts. If the stock or index drops in value within a certain time period, you make a profit. If it doesn’t, you lose money, perhaps the entire cost of buying the puts. You may already know that buying put options has been a losing trade for several years while buying call options has been a winner.

If you are convinced this market is going to plunge, I do not recommend shorting stocks. Shorting is a difficult skill for most traders to acquire, especially for beginners. Buying puts is less risky than shorting stocks. With shorting, your potential risk is unlimited. With put options, the most you can lose is the money you initially invested.

“ When you get a decent profit, sell. When you’re wrong, cut your losses quickly. ”

Five basic tips:

If you buy puts or calls, consider these five guidelines:

1. Start small. The key to buying calls and puts is to use less money to make more money. This is a rule that should be followed when you are starting out. At first, trade with no more than $1,000 or $2,000, that is, buy only one or two option contracts at a time.

2. Sell quickly. Unlike with stocks, option prices often move fast. You can’t buy a put (or call) and go on vacation, or even take the day off. When speculating with options, you need to concentrate. Options traders do not have the luxury of holding positions for long, so when you get a decent profit, sell. When you’re wrong, cut your losses quickly.

3. Learn slowly. It might take you at least a year to learn how to trade calls and puts. Consider that initial investment as tuition money as you learn what not to do, and to start developing strategies that work for you.

4. Focus on one stock or index at a time. At first, become an expert on the personality of only one stock or index. A good place to start is with is the S&P 500 ETF Trust SPY, +3.35% . You can spend years simply trading this actively traded security.

5. Make a trading diary. This is extremely important if you want to succeed as a trader. Keep track of your mistakes, the lessons you learned, and the trades you made. Keeping a trading diary is like having your own personal coach.

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