Stupid Canola puts

[farming101]

Futures go down and puts go down. Nice
Maybe it's indicating a turnaround Tuesday

[farmaholic]

101, or is the canola options market so thinly traded and maybe manipulated so the options under writer can't lose money.

Actuarial's job is to make sure the numbers crunch in the Insurers favor.

[farmaholic]

Grain Rep told me $11.75 targets were hit this week. (commodity canola)

Corrected the word we to were. My "target" didn't strike.

[farming101]

The reset calculation is complicated. Still, it's discouraging if your insurance devalues when it should be
covering you.
Something to remember is that except for the .34 cent July BO puts, all the strikes I have charted are out of the money. They have no intrinsic value.
You'll notice that the 505 and 510 strikes did hold/increase their value as they are closer to being ITM

[errolanderson]

farming . . . The value of an option premium is a function of the strike price, time and volatility.

Soy oil futures have been in a dive. Their volatility is higher than canola right now. But should Ice canola break sharply lower next week, canola puts will begin to outperform soy oil.

At that point, canola puts won't look quite as stupid . . . .

[errolanderson]

Also, whoever put this chart comparison together choose to demonstrate the performance of at and in-the-money soy oil put options as compared to out-of-money canola put options.

A more fair comparison would be to show the performance of canola 540, 530 and 520 puts, then put this chart up on agriville.

[checking]

A fake "put" chart.

I thought that was only possible with climate!

[farmaholic]

Errol, don't quote me and I should let 101 answer his own questions and defend himself. But I think his initial chart was made to compare how he could protect X number of tonnes of canola using X number bean oil contracts for the same original cost.

I obviously am not properly armed for this battle....I'll let 101 explain his intentions.

Edit
....it does look like the same chart with the addition of 505 and 510 canola. The last chart ended Jan 31. The first chart is in the $12 canola thread. I don't have the knowledge to say the comparisons are fair in the one in this thread.

[farming101]

The chart is simply a snapshot of what has happened to the options values for a select few contracts.
I know that July Bean Oil has fallen 6.55% since January 24 and July Canola is only down 1.4%, so I shouldn't have called down the canola options.

BUT,
On January 24 Farmer A decided to protect some old crop canola that he has in his bin by buying some puts. He has a hunch that canola is going higher but wants some insurance in case he is wrong. He has been tracking the prices and decides Jan 24 is the day. He buys 50 July 500 puts for $6.30 a tonne, $126 per contract, total bill $6300 plus commissions and fees. He has purchased the option to sell 1000 tonnes of canola basis July at $500 per tonne. On January 23 July canola had closed at 530.60 per tonne.

On January 24 Farmer B has the same idea. He looks at the Canola options pit and then thinks "Bean Oil has been trending lower, I wonder what options cost for Bean Oil." He finds out he can lay down around 6946 CAD plus commissions and fees and buy an option to sell 600,000 pounds of bean oil basis July at 34 cents a pound. On January 23 the July bean oil contract had closed at 35.62 cents per pound.

On February 17 both farmers check their position.

Farmer A has found out his favorite grain company has lowered their bid 12 cents a bushel for July delivery since January 24. So his 500 tonnes of canola in the bin is now worth $2645.46 less than January 24. He checks his options thinking they will have compensated. Nope. What he paid $6300 for is now pegged at $5300. So he is down $3645.46.

Farmer B also sees that his 500 tonnes of canola in the bin has lost $2645.46. He looks at his Bean Oil options. They have gone up in value about $7579 CAD. He is $4933.54 to the good. He realizes that things went his way and that next time it might not work out the same but on February 17 he is happy.

Both farmers have 125 days left to see what their options and the canola market will do. Farmer B could decide to sell back his options, sign up a DDC and be up $9.87 a tonne on his canola in the bin.

It's just an example. Other strategies will have a different outcome. I really don't know if the options could have been purchased for those exact values on January 24. But quotes for July 500 puts were 6.30 per tonne after the close
34 cent July Bean oil puts were out of the money except briefly intraday on January 30 and then they closed ITM on February 17. No one knows what will happen next week. But if Canola continues lower and Bean Oil continues lower I think Farmer B's option play will still be firmly in the win column.
Insurance is paid to lower risk, but the premiums have to be reasonable. Who doesn't shop around to see where they can get the best deal on insurance?

Hey checking do some "checking" on my numbers

[farming101]

Values for July 520, 530 and 540 Canola puts Feb 9-17/17