Coffee Futures and Options Market Trading

Learn the most effective strategies for buying and selling options on futures contracts. Also learn producer and consumer hedging strategies.

*The information contained within this webpage comes from sources believed to be reliable. No guarantees are being made to the content's accuracy or completeness.

The History of Coffee and Coffee Futures Arabica Trading

Coffee's beginnings are lost somewhere in mankind's ancient history, but it is believed to have originated in the Ethiopia around 3 A.D., where ground beans were used to season food by the various inhabitants of that area. It is also believed that about 1300 A.D., the Southern Arabians first roasted and brewed coffee for use as a beverage. Today, coffee is one of the world's most popular drinks and is among the world's most important internationally traded commodities, with a number of economies largely dependent in its trade.

ICE Coffee Futures and Options Quick Facts

37,500 pound contract size
each one cent move equals $375
trades Mar., May, July, Sep., Dec.
Coffee futures symbol (KC)

Here is a brochure from the ICE for coffee C futures and options.

ICE coffee brochure

The Coffee, Sugar and Cocoa Exchange (CSCE) was the premier world market for the trading of coffee futures, sugar futures and cocoa futures and options, and since 1993, an innovator in the trading of futures and options in dairy products. The CSCE was located in the world trade center before it was destroyed in the September 11 terror attacks. Symbolic of the strength and stability of the futures markets, coffee, cocoa and sugar futures contracts were actively trading within one week of the destruction of the exchange. Since then the CSCE has since merged to become part of the New York Board of Trade (NYBOT) and merged again with the Intercontinental Exchange (ICE).

Are you a coffee hedger? If so, click here to learn more.

Coffee Options on Futures Contracts Explained

A coffee call option gives the purchaser the right but not the obligation to purchase the underlying futures contract for a specific time period and a specific price (strike price). Let's say that you wanted to purchase a May coffee $1.50 call option and pay a premium of $1,200.

This means that you bought the right but not the obligation to buy 37,500 pounds of May coffee for $1.50 per pound. Of course, very few options are bought for the purpose of taking delivery but that is one potential outcome. Chances are that you either bought the coffee option to hedge your price risk in the physical coffee market (you may be a coffee producer or coffee end user) or maybe you are speculating that coffee prices will go higher in an attempt to make a profit.

A coffee put option gives the purchaser the right but not the obligation to sell the underlying coffee futures contract for a specific time period and a specific price. Let's say that you wanted to buy a May coffee $1.30 put option and pay a premium of $1,300.

This means that you have the right but not the obligation to sell 37,500 pounds of May coffee at $1.30 per pound.

What is the delta factor?

The delta factor of an option represents the estimated percentage of change an option will receive based on the movements in the underlying futures contract.

Let's assume the May coffee call option above has a 30% delta factor. This means that if the underlying futures contract were to rally by $1,000, then the call option would accrue by approximately $300 or 30% of $1,000 in the May coffee futures contract.

What is theta?

Options are wasting assets which means that they lose value as time passes. The theta of an option is the measure of time decay.

Let's assume that you bought a May coffee $1.50 call option with 60 days left until expiration. Let's also assume that the coffee futures prices have moved very little over the last month and are exactly the same price 30 days later. Your option will have lost 30 days worth of time and therefore will be worth less today that it was when it had 60 days left until expiration.

What is vega?

Vega is a measure of the implied volatility of an option contract as it relates to its underlying futures contract. For instance, if the underlying future contract is extremely volatile then the implied volatility of the options of that futures contract will be affected.

In a high implied volatility environment option premiums tend to expand. Conversely, in a low implied volatility environment the option premiums tend to decrease.

*Contract information changes from time to time. Please click here to see the most recent contract specifications and click here for the most recent trading hours.

ICE Coffee Futures Contract Specifications

Trading Units: 37,500 lbs. (approximately 250 bags)

Trading Hours: 3:30 A.M. to 2:00 P.M. New York Time (verify with exchange)

Price Quotation: Cents per pound

Delivery Months: March, May, July, September, December

Futures Ticker Symbol: KC

Minimum Fluctuation: 5/100 cent/pound, equivalent to $18.75 per contract.

Daily Price Limits (from previous day's settlement price): 6.00 cents with variable limits effective under certain conditions. No price limits on two nearby months.

Coffee Options Contract

Confers to buyer the right to buy (in the case of a call) or sell (in the case of a put) one coffee "C" futures contract.

Trading Unit: One coffee "C" futures contract

Trading Hours: 9:15 A.M. New York Time until the completion of the closing period which shall commence at 12:30 P.M. (verify with exchange)

Price Quotation: Cents per pound

Contract Months: "Regular Options": March, May, July, September, December; "Serial Options": January, February, April, June, August, October, November

Ticker Symbol: KC

Minimum Fluctuation: 1/100 cent/pound, equivalent to $3.75 per contract.

Daily Price Limits: None

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To see other soft commodity contracts visit cocoa futures ,orange juice futures ,cotton futures and sugar futures.

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