Time to Buy Wheat Options?

[slinger]

Minneapolis wheat futures prices seem to be finding reflecting concerns about delayed seeding/reduced North American spring wheat acreage. Should a person be looking at buying wheat calls? What market/month/strike price would you look at? Has anyone had a look at the contracts to enhance CWB payments based on options (e.g. UGG milling wheat rally master, Cargill Optimum Price Milling wheat contract, etc.)? Do they have a fit in your pricing strategies?

[eric]

Minneapolis wheat futures looks to be pulling back from the dramatic run that we saw at the beginning of the month. It is currently consolidating and, if it fails to hold these current levels, should continue lower in the next week. Timing is everything, and seasonably, wheat should remain under some pressure as we enter harvest here in the states. As for buying calls, now is not a bad time, since volatlity is low, and call premium cheap. September 360 calls are currently 7 1/2 cents. December options get much more expensive as you buy more time. Look at the Dec 380 calls at 10 cents or better.

[eric]

Assuming a person is bullish wheat (which I am), what factors should a person consider in making the decision of going long futures versus buying calls? Would I be better to buy MGE wheat December futures on dips under the current $3.50/bu level or buy Dec. 380 calls for the 10 cents/bu premium you mention?

[eric]

It all determines on your personal risk parameters. However, considering the time of year (pre-harvest), and the tremendous pressure that this market has been under, I would rather not be long futures. Calls provide you with the flexibility to sustain what could be a short-term, sideways and volatile market while waiting for the uptrend that you are looking for. If you don't want to pay all that premium up front, consider buying a call spread and cutting your costs.

[charliep]

Eric: Could you go into a little more detail on a call spread strategy that a farm manager might use. Also, I have a MGE Sept 350 wheat call I bought for 7 cents/bu. This value of this call has ranged from 9 to 17 cents/bu over the past couple of weeks. Given around 2 months to expiry, this call is going to start loosing value. Any rally/increased volatility has potential to increase the call value but I realize I own a depreciating asset in terms of time. Any thoughts how I can minimize this impact? Is there a time I should consider rolling to a Dec. option or some other strategy?

[168]

I generally look to protect profits on an option position when the value of my option has doubled. It is usually a good idea to consider rolling or liquidating the position if you have tripled your initial investment. On the other side of the coin, risk an 80% drawdown in option value on an out of the money before salvaging value. If you get inside of 30 days from expiration, consider liquidating to salvage value, rolling to another month, or taking profits as time value really starts to depreciate at that time.

[Oliver88]

Wow in 1999 this was a marketing discussion board. 👍🏻