Options

[macdon02]

A question ....you said.....


The November contract is trading at $12.00, so you decide to stay right "at the money" and choose a $12.00 strike price. The CBOT $12.00 strike for put options is trading at .60 cents per bushel, so your contracts cost you $3000.00 each. That's a fair chunk of change, but you have to think of it as buying an insurance premium - your premium guarantees you the right to sell 10,000 bu of soys at $12.00/bu, no matter how far the board price drops.


If you paid 60 cents to get $12 then isn't your net on that bushel $11.40 ??????

Only if you let it go to expiry. The premium paid is based on time value and intrinsic, the possibility it'll go higher. So ideally you buy calls on a move down, lowering the possibility of an up move, and vice versa on puts. 85% of options expire worthless. You don't want to be selling when the market is working against you... ideally

[macdon02]

Cargill and viterra have programs you can use to "hedge". You can't be double long using these and they take a larger commission then a broker would. The paperwork to set up an account through a brokerage is very easy, although lengthy and any decent broker will walk you through it. With online banking it's just a couple clicks to fund. Taxes..... well the losses are deductible. I don't recommend holding into expiry, look to exit approximately 30 days or more prior. I'm holding July Canola calls and planning on dumping into the spring rally, no later then first week of June, they expire June 21. The number of blown out accounts is something like 91% over 5 yrs as far as getting rich is concerned..... having said that it does provide a producer flexibility that you can't get anywhere else. I highly recommend selling physical before buying the calls(prevents double long, remember all next yrs production is "long" until sold as well). I won't discourage anyone from trying it, just use moderation and get educated. You'll want to get to know seasonal charts. Have a realistic target in mind and don't deviate from it, ie $.50-$1. The best decisions are the hardest to make, if you know that feeling it'll keep you safe and put money in your jeans(rejecting greed, makes my skin crawl but serves a person well). It's over 3 yrs now in canola since the low and we haven't taken it out, this up move is no longer a reaction. We are setting trend on a yearly level.

[errolanderson]

Errol - what essentials did I miss? :-/

burnt . . . good job

The key about options is it is an extension of your marketing toolbox. For example, for growers wanting to move their canola due to storage issues and inject cashflow into your business, sell the cash canola and replace with calls as a consideration. If canola continues to drop, you'll be glad you sold the cash. If South American throws us a weather scare, ICE canola futures would climb.

Let's say, you buy March $500 calls at $10/MT and the March contract rallies to $530/MT in January. Your calls would be worth . . . March futures $530 - March strike $500 = $30 plus time and volatility. If canola is suddenly volatile, your call premium may reflect a further $5 to $10 extra pushing premium to $35 to $40/MT

Less say you sell the March $500 call at $35/MT during this rally - premium paid of $10 = $25/MT gain minus brokers commission.

If March canola drops to $480/MT, your call option would expire worthless. If there is time left before expiry, there may be some value left in call option to sell, but you will be glad you banked your cash canola already.

Puts are just the reverse . . . you are guarding the downside. In my career, our largest gains by clients have been owners of put options. This is a hedge. Best time to purchase puts is during a heated bull rally. No one knows where the top is, we just know the rally won't hold. Scaled-up put buying program during weather markets is a strong marketing strategy. Remember, markets tend to step up and then take an elevator ride down . . . .

all the best with your marketing . . . .

[ajl]

I find options premiums on grain markets quite high so they will not pay for the average producer. If you are a large farmer and can afford margin money, you are better off to write calls on rallies or puts on sell offs. That way you pocket the premiums. I do some covered call writing on stocks, which is easier and more efficient for a small trader. Best way to make money on the TSX. Currently short BCE november @56. Canuskistan has a zombie economy.

[burnt]

I find options premiums on grain markets quite high so they will not pay for the average producer. If you are a large farmer and can afford margin money, you are better off to write calls on rallies or puts on sell offs. That way you pocket the premiums. I do some covered call writing on stocks, which is easier and more efficient for a small trader. Best way to make money on the TSX. Currently short BCE november @56. Canuskistan has a zombie economy.

I have known guys that did that, and with some success, or so they said.

However, I could never understand how that could be seen as reducing risk (if that's the objective), but rather saw it as double exposure to the market forces.

It would/could work if you are watching every move and ready to pull the trigger is things start to go against your hedge, or are using fairly tight stops.

Writing options has unlimited risk, in my understanding. Certainly only for the stout of heart.

But I agree that the premiums are high, when weighed against the payback especially. So for that reason, someone is making money in writing that option.

[burnt]

What the heck is this - an honest to goodness marketing question on "commodity marketing" board?

[ajl]

I have known guys that did that, and with some success, or so they said.

However, I could never understand how that could be seen as reducing risk (if that's the objective), but rather saw it as double exposure to the market forces.

It would/could work if you are watching every move and ready to pull the trigger is things start to go against your hedge, or are using fairly tight stops.

Writing options has unlimited risk, in my understanding. Certainly only for the stout of heart.

But I agree that the premiums are high, when weighed against the payback especially. So for that reason, someone is making money in writing that option.

So long as you have the underlying asset in the bin, then you are hedging. If you have sold a put after the market declines then you have the premium to offset some of the declines in the value of inventory and as such have reduced risk.

[Oliver88]

Errol if you used a put option for canola what month would you use?

(Canola harvest yields and quality for the prairies seems to be a mystery for many reasons.)

[errolanderson]

Errol if you used a put option for canola what month would you use?

(Canola harvest yields and quality for the prairies seems to be a mystery for many reasons.)

Oliver . . . a suggestion

March canola $500 put for $15/MT or lower. March canola currently around $492/MT meaning strike price is already $8/MT in-the-money. A solid running head start, and strong delta should canola slump continue.

PS: Delta is how well the option premium follows the change in the futures.

Owning a strong put is a strategy that may allow time for growers to wait out for improved basis levels.

[Kihei]

Why not just have a trading account and buy back march canola ?