Canola Wow!

[hobbyfrmr]

Thank you wd9 for writing it out. I get lost in
details pretty quick, so I can now refer to your
clear example until I have it memorized. I like the
refresher course.

[wd9]

Errol, as in being able to sell the jan
option in Nov if the price is close? Its
strike is $10 (490) less in jan for the
same price, $16.

Am i not losing $10 bucks on the
intrinsic value for buying that time
value? Isn't intrinsic more valuable to
a farmer?

[errolanderson]

wd9 . . great question. Let's say its
Nov and you want to sell your Jan put
option.

The extra 'time value' left in the Jan
put is an advantage over the Nov put and
will help compensate for the difference
in intrinsic value. (My apologies for
those not familiar with options, this is
difficult to explain typing it out). The
extra premium (money) paid for the Jan
should be partially compensated for the
time value left. Note: An option premium
is made up of intrinsic value and time
value.

In my view, owning Jan over Nov has its
benefits because 'extra time' has its
value. If you say that you want
protection until harvest only . . . then
Nov is what you should purchase.

Too bad we couldn't have a beer in hand
and a chalk board, it would be easier to
explain.

Errol

[TOM4CWB]

WD9,

Better to take a 'long' position to offset the put and then a better basis can be locked in during the December time period... if you are thinking the markets are going to rise... and want to lock in the profit your Put option has made... should that be the case.

I have found buying and selling options generally an expence not worth the cost... and using up the premium through the alternatives of offsetting futures much better value.

[jdepape]

Kodiak - You and I think alike. Spreads tell an
interesting story. Old crop / new crop inverse of
$32 (July over Nov) plus strong cash basis tell a
tale of tight stocks (I'm hearing of premiums
(overs) all over the place - like $10 over in
Yorkton and $5 over in central AB) I'm told
crushers are also advising guys that they need
the stuff NOW.

I would say don't confuse old crop strength with
new crop prospects. Two different animals.

If you're bullish new crop - don't spec with canola
in the bin. It may be too early to say where old
crop goes but I think the message is it still has
upside potential - just from a cash requirement
perspective. (spreads and basis behavior tell me
this is commercially driven, not spex or funds)

Up to end of last week, just over 9 million tonnes
of canola had been delivered. That's about 56%
of the supply (64% of the production) through
54% of the year. A very healthy pace.

Current stocks in primary elevators is about 600k.
This time last year it was about 950k. With
current pace and expected movement, the 600k
sounds light. And once road bans hit, they'll want
to make sure they have enough in the pipeline.
Tells me premiums will continue to be firm.

Take advantage of old crop strength and trade
new crop separately. Buy new crop futures or do
your option trades but don't sit on old crop canola
through the summer.

Remember - inverses are meant to be sold. (don't
carry any stocks through an inverse)

[wauchope]

where do you guys buy your options?

[wd9]

Your friendly neighbourhood broker.

Much food for thought!

[errolanderson]

Growers . . . just to let you know.
November $500 canola puts traded for
$12.50/MT this morning.

$500 - $12.50 = $487.50 ($11.05/bu) -
est fall basis.

rally continues today . . . .

Errol

[Choice2U]

Bought 40 Mt of $500 Nov puts for $12.50. Next target is another 40 Mt. of $520 puts for $12.50 which will require another good move in the market. This takes me to 20% sold at $11.26 for new crop plus another 20% with an $11.00 bottom ($500-12.50) not including basis. I am a smaller farmer that is paying on land and equipment and will need cash come the fall for payments. I also locked in 45 Mt. of wheat at $6.03 (FOB elevator) #2 CWRS 12% protein which is normally what I grow so that I can deliver some wheat off the combine as I need storage space and more cash flow. I have hauling & storage limitations so I stay away from high volume crops (oats/barley) and thus grow a little flax (probably need to store) and a few lentils which may or may not have upside so that is why I lock in some canola & wheat. Please critique (harsh is acceptable) on how I could have varied this plan. Thanks.

[Hopperbin]

A 500 per ton put costing 12.5 will net you an 11.06per bushel min price before basis. The price you paid for that option was just above 28 cents per bushel. Futures today is 531 per ton or 12.04 before basis. Perhaps you bought that put a couple days ago, today it does not look so good.