From the unexpected file, should a person be buying Canola Call Options here?

[TechAnalyst]

To be clear, I am still very concerned about a continued move lower for the oilseeds and believe having price protection is very prudent risk management. I still believe holding the soybean or canola puts previously discussed is important.

The idea of buying canola call options is primarily to protect oneself against a surprise rally if you have delivery obligations on presold production and a drought reduced crop potential.

The burdensome supplies and trade implications are well documented. Matters could get worse for soybeans if the planting delays in the US Midwest result in corn acres being switched to soybeans. The planting deadlines are fast approaching for corn and the flooding rains only seem to be getting worse. The new farm payment just announced will pay a per acre rate regardless of what is seeded (but something has to be planted to get the payment). That is were things could get worse for soybeans.

On the other hand, the delays could last long enough that soybean acres are lost as well. That would combine with an expected decline in yield (due to seeding date) and a likely strong corn market to trigger fund short covering. With money manager positions at a record net short for soybeans (168,835 contracts or 840 mil bu net short) and just off the record for canola, a weather rally could be violent. Keep in mind, the money managers have had a net long position of 200-250,000 contracts on multiple occasions. As such, that one group alone could buy over 2 bil bu of soybeans just to go from their extreme net short to extreme long.

Back to the original point, if the drought conditions in Western Canada don't improve and actually start gaining some market attention, they will certainly add urgency to any rally. That's when having canola calls in place to give you the option to own futures on any tonnes that are presold would be helpful.

As of today, Nov Canola closed at $455. Nov $470 calls closed at $8.20/t, $480 calls at $5.80 and $490 calls at $4.10.

Just a thought...

[farming101]

No reason for buying calls now.

Having said that our business is based on whatever falls on us out of the sky so might as well go for it

[farmaholic]

470 - 455 = 15, 15 - 8.20 = 6.80, 6,80 ÷ 44.092 = 15.4 cents. Not much of a reward.

480 - 455 = 25, 25 - 5.80 = 19.20, 19.20 ÷ 44.092 = 43.5 cents. Getting better.

490 - 455 = 35, 35 - 4.10 = 30.90. 30.90 ÷ 44.092 = 70 cents.. Interesting

So help me out. Does owning the call give you the right to sell it at the strike price?

On presold canola would this be a bad strategy, but who would presell at 455?

If you presold at higher than the Nov close. Your potential benefit shrinks.



Just trying to understand it.

Imagine, a market based thread!

[Rareearth]

Farma, sell some at the money puts, they would pay for the call purchase and put money in your pocket for the day.🤨

There is a very fine line between hedging and speculation

I don’t know if there is enough blood in the street yet to look for a bottom ( bottom puckers are cherry pickers😀)

[farming101]

470 - 455 = 15, 15 - 8.20 = 6.80, 6,80 ÷ 44.092 = 15.4 cents. Not much of a reward.

480 - 455 = 25, 25 - 5.80 = 19.20, 19.20 ÷ 44.092 = 43.5 cents. Getting better.

490 - 455 = 35, 35 - 4.10 = 30.90. 30.90 ÷ 44.092 = 70 cents.. Interesting

So help me out. Does owning the call give you the right to sell it at the strike price?

On presold canola would this be a bad strategy, but who would presell at 455?

If you presold at higher than the Nov close. Your potential benefit shrinks.



Just trying to understand it.

Imagine, a market based thread!

No, a call gives you the option to buy a futures contract at the strike price.

So, in the above example Nov futures would have to go above 478.20 for your 470 call option to be in the money. (this is not including the commission charged by the broker to purchase the option)

If, for example, Nov canola went to $550 because of a poor 2019 crop you could exercise your option to purchase a Nov futures contract for 470 and net 71.80 per tonne. (550-478.20)
Of course you have to turn around and sell the just purchased contract to cash in on the deal. Could be some slippage in a fast market.

So, you presold some canola yesterday for Nov delivery for $9.71 (428.12/t)

Come early October it's clear the crop was a bust and Nov futures have gone to 550
You exercise your call, sell the contract and bank 499.92 for your canola. (428.12+71.80)

Or if you didn't harvest any canola you can use the call option money to help buy out your delivery contract and lesson the pain, which would be substantial

Who would presell at 455? Who indeed, with the plants just breaking the surface and struggling to survive.....

[TechAnalyst]

Perfect explanation Farming101.

This can also apply for previous canola sales. If you had contracted canola for fall delivery when Nov futures were $490/t, buying a $490 call would be very cheap insurance that you would be out very little should 2019 turn into a disaster (or suffer very little harm if you had to buy out a delivery contract).

[farmaholic]

Thanks for replies.
I will look at them more in depth later.

How many people actually do options?

Obvioulsy I don't.

[SASKFARMER]

We used this before and will look at again

[bucket]

Not to shit on marketing ideas BUT you guys realize the US soybean farmer got 1.65 USD per bushel on their soybeans with no money spent....and are about to get another payment....


1.65usd is 2.20 cdn.....

They are getting close to 4 bucks cdn on every soybean bushel....from the government...And I doubt very many cheques will be sent back...

Thats quite a marketing system they have in the states.


And our prices are set off it....

[AlbertaFarmer5]

Thank you for a marketing related thread, please contribute more often. And so far the usual suspects haven't even showed up to blame it all on global warming and to bash Trump.

[blackpowder]

After years of dabbling.
I use futures markets to hedge half expected crop, adjusted upon harvest. Either options strategies or futures short. I never re-own. Long the bin only.
I sometimes lock the basis.
Hedges are lifted the day I sell physical.
I do forward sell some. Sometimes a lot. This is kept out of hedge program.
Theoretically, I should have my startup cash in account upon retirement.
So far I have a reasonable excess.
(Markets downtrending last couple years).
You can hire someone to operate this if you do not have the discipline or comfort.

[errolanderson]

After years of dabbling.
I use futures markets to hedge half expected crop, adjusted upon harvest. Either options strategies or futures short. I never re-own. Long the bin only.
I sometimes lock the basis.
Hedges are lifted the day I sell physical.
I do forward sell some. Sometimes a lot. This is kept out of hedge program.
Theoretically, I should have my startup cash in account upon retirement.
So far I have a reasonable excess.
(Markets downtrending last couple years).
You can hire someone to operate this if you do not have the discipline or comfort.

blackpowder, thanks for posting. Marketing is about all about discipline and solid business management.

[farmaholic]

Sometimes it doesn't matter how much "market power" you possess...sometimes it works in your favor other times not. Greed and obstinance aren't good marketer qualities.

[bucket]

blackpowder, thanks for posting. Marketing is about all about discipline and solid business management.

Now Errol ...can you explain the close to 27 billion USD of marketing discipline and business management american farmers are receiving????


Canola is priced off the soybean market and that 27 billionUSD is affecting every one of our commodities here in western Canada....

Just keep burning equity boys....its all good...

[errolanderson]

Thoughts on option purchase whether puts (to guard price downside) or calls (to reopen price upside).

Buy quality or quantity? Typically, we suggest to growers to purchase quality meaning at or in the money options, if possible. Realize premiums are more expensive, but some growers have protected their crop with Nov $490 and $500 put options, back when they cost $15 to $20/MT. Out of the money options are cheaper, but you will need a homerun to cash them out in this lethargic market.

It doesn’t matter what commodity you pick, there are no homeruns to be had. To me, rallies like current corn should be viewed as a hedging opportunity. Trump’s trade war has severely messed up global trading patterns. We aren’t going back to the good old days anytime soon.

Many growers use options as it does help maintain marketing discipline (blackpowder’s post). There are no margin call concerns as a purchaser of a put or a call option. We have seen many times in our career where an option position was devaluing and appeared going to expire worthless only to spring back to life quickly. The problem with futures trading is; margin call grief can knock you out of your position at the worst possible time.

Hope this makes some sense . . . .