options vs futures

[ado089]

Maybe it's time we get back to marketing discussions. What are people's preferences for price hedging tools? I've used both successfully but don't like giving up 50 cents to buy options. I've been using stops with an equivalent loss to the options premium for the same period. It works OK but the market can whip saw and punt you out. What are others doing to reduce hedging costs?

[macdon02]

Whats the number? 85% of options expire worthless? Im just using futures and pyramiding as I hook the trend, never had much luck with options. Futures have more risk but as long as you stick with trend and dont try to pick bottoms or tops risk isnt bad. Start with onesies and twosies. Add on. Leave some room and go slow. Market seems to smell stops.

[macdon02]

Oh and make darn sure you a stop somewhere. Thursday was not cool, proving anything can and will happen

[charliep]

I would add access to working capital or a lender who understands futures/your marketing plan. The nice thing about options is you know your cost whereas futures, you have to be prepared for margin.

My only other comment is that having options expire worthless is not a bad thing. You likely have coverage using puts on a small portion of your crop so prices above your strike price means better income. You can curse yourself for spending money on the premium but higher are a good thing.

I always start with what you want to accomplish. If you want to lock in price, futures are the way to go. If you are nervous about a rally will last and want an insurance policy, options/puts are the way to go.

[errolanderson]

depends on volatility . . . .

If a market (like soybeans), owning futures has been difficult as margin calls were an issue. Owning options was a far stronger move (IMO) as you can stay disciplined.

Feeder cattle short hedges have been a nightmare, but options all you risk is the premium.

My favourite strategy has been a scaled-up put option buying program into an overheating market.

[Braveheart]

We find floating the margin for outright futures just too much for our farm. Nowadays, the volatility and rapidly expanding limits leaves us financially uncomfortable.

We have used put options but not as much as we could/should. I like the idea of spreads to help offset the cost of the option, or to get a strike price at or in the money made more affordable.

I think grain cos could offer better service to customers by making over the counter derivatives available. Might mean more farmers managing price risk while being divorced from production risk.

[mcdon]

If worried about downside, should sell calls.

[ado089]

I don't care to speculate too much and I generally look at buying puts as a price insurance but to get any amount of time in the market they are too expensive. A lack of liquidity in the cash market makes hedging even more difficult as I think moving forward in this crop year bids will move by basis and less so by futures.

[charliep]

In the shouda, woulda, couda category I note where we are today on canola. Basis levels in many areas have narrowed up from $50 to $60 under to over futures today (positive basis). Someone who had sold futures over the winter and sold cash today would have sold at a hold price and put an additional $1/bu plus price in the bank through basis. You likely would have had to roll a July/November with some impact carry/complexity but it doable. Hindsight but the reality.

[URL="http://www.farms.com/markets/?page=chart&sym=RSX14&domain=farms&display_ice=1&e nabled_ice_exchanges=&studies=Volume;&cancelstudy= &a=W"]Weekly canola futures[/URL]

[charliep]

Any comments on this question if the crop were wheat. Different market/US dollars but I think this is one market where farmers having futures in the tool box is a good thing. Given quality/basis risk, signing deferred delivery contracts will always be a challenge. Using futures to capture overall market moves and being patient on selling cash is likely a good strategy. You still have basis and currency risk but a lot of flexibility than being locked into a company for physical delivery/price.

[charliep]

Some history. Not trying to rub salt in anyones wounds but I like to look back and ask myself what could have been done differently as a learning experience.

[URL="http://www.farms.com/markets/?page=chart&sym=MWZ14"]December MGEX[/URL]