Watch the Canola Carry

[farming101]

Yes I see you rationale for incorporating the option premium into your deferred delivery contract.

One thing to remember with options is that unless there is a huge runup in future prices a call option is going to lose value the nearer it gets to expiration and the longer it stays out of the money.

So, if one is trying to leave their opportunity for a better return open by buying a call, it may be better to buy an at the money call. They are more liable to move dollar for dollar with any rise in the futures.
They also are a lot more expensive.

To offset this a guy could do a 2 for 1 if they want to buy a cheaper option, or they may buy an in the money call and sell an out of the money call to lower their cost.

All of these ideas are to limit or offset risk. If a guy can't afford to accept a low price(if cash prices really tank in the future) it's a great strategy. Some tactics increase the chance of a better return but do put a limit on it.

This little comment doesn't tell you much really. The book on options is pretty thick.

[macdon02]

Sorry 1% My brain skipped

[errolanderson]

View the sell the carry and replace with a call as a strategy to reduce your price risk, while still being able to take advantage of a futures price recovery.

Farmaholic, you make good points. I may get booed for this statement, but through my career, the biggest mistake producers can make is; storing unpriced too long in the bin.

Call replacement strategy reduces this risk as your cost is limited to the value of the call, not a whole bin of unpriced grain.

No one knows where the spring market for canola will be. But to me, the recent sell-off placed canola in a technically oversold position. We have seen a nice rebound ($30/MT) off these lows.

One thing for sure, there is tremendous demand for Cdn canola. This will trigger basis premiums in the weeks ahead regardless of how big the crop is.

Growers will dig in forcing buyers to sweeten the basis pot, even if bins are full. Good discussion and great comment from all . . . .

[macdon02]

Production cost I'll argue is irrelevant to cost of carry, it's the same whether you have 500 or 500000 bushels. Think of it as the opportunity to do something with the actual money rather then holding a physical asset. With low interest rates I know it doesn't seem like much but it is real. I been using 4% lately. Until you realize one needs to gain a dime a month holding till post seeding requires $.80 gain over selling into the harvest slot. Does anyone know where seasonal charts of canola basis is available? Preferably for free?

[farmaholic]

Someone please answer this.... at what range is a call considered "in the money"?

[farmaholic]

I can agree with the opportunity to pay down debt and reduce interest, but to cash out the canola and put the money in the bank at dismal rates hardly pays. I am not arguing and see your point. But everyone's circumstances are different.... that is why I compared it to COP which is slightly different for everyone as well. Sometimes the market will factor in the "loss of opportunity expense"...carry, but it would never amount to a dime a month at one time(far out). I like gambling on the physical. Between futures gains and positive basis adjustments... there can be some nice premiums...but you have to watch.

There are some "dismal" canola prices now(harvest thief pricing in affect) but I bet at least $11.00 street commodity canola is in the cards in the future. There is my two cents.....

[farming101]

Yes, know your COP and how badly you need the income for expenses/payments.

I don't gamble but I like farming. There's a riddle!

[errolanderson]

farmaholic . . . lets say Jan canola is at $470/MT

a Jan canola $460 call is; $10 in-the-money
a Jan canola $470 call is; at-the-money
a Jan canola $480 call is; $10 out-of-the-money.