I am trying to understand who would be a non-speculative buyer of options contracts on futures. There are a plenty of descriptions of how options work online, but mostly they omit this crucial part of the deal: who would be the genuine buyer of a CALL contract on a commodity?
I came up with the following possible explanation and would like to confirm whether my understanding is correct.
- On 1st of June 2000 Palm Oil Front Futures contract is valued at 70 USD
- A speculative investor purchases CALL options contract (1000 multiplier, 1.33 per contract) with strike 100 and expiry in Dec 2000 on Palm Oil DEC 2000 Futures contract (valued at 50 USD at the time - backwardation is in place), paying 1,330 USD
- Palm Oil price rises to 110 USD in November 2000
- Palm Oil shampoo manufacturer decides that they need to purchase 1000 Palm Oil units to be delivered in December 2000, so they look at the market and decide that they would now have to pay 110 USD per unit of palm oil, if they purchased the front futures contract (at a total of 110,000 USD).
- Palm Oil shampoo manufacturer reasons that if they could purchase an options contract from the speculator they can save some money.
- The intrinsic value of the contract that our speculator now holds is 10,000 USD (110 USD current price - 100 USD strike price, times 1000). If the speculator sells this contract at 9,000 USD to the Palm Oil shampoo manufacturer, the former will gain 9,000 USD - 1,330 USD = 7,670 USD, and the latter will get a 1,000 USD discount on their Palm Oil if they execute the options contract.
Is that how it actually works? Who is the potential buyer of the options contract that the speculator purchases?