What is a Buyer's Call
A buyer’s call is an agreement between a buyer and seller where the purchase of a commodity is at a specific price above a futures contract which is for a same grade and quantity. The agreement gives the buyer the option to fix the commodity price by either purchasing a futures contract from the seller or indicating to the seller the date at which the transaction price sets.
Another name for this agreement is a known as a call sale.
BREAKING DOWN Buyer's Call
A buyer’s call occurs when a buyer needs a commodity which the seller has in stock. However, the buyer does not require delivery of the physical commodity immediately. Instead, both parties agree to transfer at a later date. A commodity futures contract agreed to by both the parties, binds the agreement.
A buyer's call may be used instead of buying the commodity on the spot market. The spot is a market for financial instruments such as commodities, which are traded and delivered immediately, or on the spot.
The buyer's call transaction is at a price above a futures contract strike price. The buyer satisfies their need for the asset at a locked price, and the seller receives the futures contract which would replenish his inventory at a later date. Both the quantity required and the quality exchanged of the commodity must match.
In options trading, there are two types of contracts.
- A call allows the owner, who is long the call, to buy an underlying good at a specified exercise strike price within a specified period. It requires the seller, who is short the call, to deliver the underlying product when the call holder exercises the call. A call option increases in value if the price of the underlying commodity rises.
- A put permits the owner to sell the underlying commodity at a specified exercise strike price within a specified period. A put requires the seller, who is short the put, to purchase the underlying good when the put owner exercises their right to sell that good at the strike price. A put increases in value if the price of the underlying commodity falls.
Example of a Buyer’s Call
A buyer who needs 10 barrels of sweet crude oil immediately could purchase them on the spot market for $50 per barrel. However, if that same buyer does not require the oil for another six months, a buyer’s call would allow them to enter into a contract with an oil company that has the oil for a specific price and a future delivery date.
By entering into the call, the buyer would either offer to buy a six-month future contract from the oil company in exchange for the barrels of oil or offer to buy 10 barrels of oil at some point in the future at a fixed market price. In this scenario, the oil company would be able to make a profit from the buyer’s purchase while still obtaining their required amount of oil inventory, six months into the future.