Put and Call Volumes at WCE?

[melvill]

Recently I sat in on a farm commodity risk management workshop where one of the participants (a farmer) regularly writes options at the WCE. He said that the volume numbers at Winnipeg are sometimes deceiving. His point was that it may be that the volume numbers are low because there are limited numbers of people wanting to buy options rather than limited numbers of people willing to write them. In his opinion there are always or nearly always writers willing to do business but not many buyers.

Any thoughts or experiences on this person's ideas about WCE options? Anyone else have experience?

[Lifer]

I would like to buy more Put options. What is being offered seems a bit expensive.

In the past we have had trouble trading our options and have had to exercise in order to get out giving up all time value invested.

Nov 290 Put at $18.60 sets a 260.40 floor. With the market at 293 I'm thinking $13 or $14 would be closer to right.

I guess offers need to be put out there again and see what happens.

[Lifer]

Maybe the reason they haven't worked as well as they could for me is because I can't add or subtract.

The 290 put at 18.60 would make a 270.40 floor budgeting 1.00 for brokerage and expenses

[melvill]

Lifer, glad your math skills picked up in such a short time.

I'm curious about your comment that you "have had to exercise in order to get out giving up all time value invested." Usually an option owner exercises to get out the intrinsic value. An exercise never recovers time value. The only way to recover time value is to sell the option to someone else (offset it).

Maybe you inadvertently chose the wrong word.

[melvill]

More interestingly, the instructor at the price risk management course, Dr. Larry Martin from the George Morris Centre, suggested that his fule of thumb is that an option premium should never be more that 3% of the value of the strike price. That usually means buying an option at least one strike price out-of-the-money.

I'm still looking for other comments on other producers who've used options.

[Lifer]

The November 290 Put above purchased to establish a floor with $21.60 time value in it. Looking to sell the crop at $320. Market moves to $320 in June sale is made and the put is no longer needed.

I wish to exit this put after the sale and recover a portion of the time value. I have found this difficult to do in the past.

[melvill]

Your strategy is correct - try to recover remaining time value after market rallies and some forward sales are made.

However, three points:

1)You are right. It might not be easy to offset (sell) the put since it is $30 out of the money. If a situation like you describe were to happen, your broker would be better at advising whether or not you can offset your put. Maybe it's far enough out of the money that you won't be able to offset or maybe you need to offer it at a price somewhat below what the WCE is suggesting with its calculated values to get some interest.

2) Sometimes WCE canola options offsets take two or three days to get done.

3) Chances are that you didn't forward sell all of your growing crop - maybe only 1/3 or so. Maybe that put should be retained as insurance against the remainder of your production just in case Newton's Law (What goes up must come down) kicks in and hammers the price on the remainder of your production.