Wheat calls

[lorne]

Any change in your previous recommendations re. purchasing July CBOT 310 wheat calls ?

[brian]

An update on CBT wheat calls is in order before answering your question. When you last asked this question (Feb. 8 - CBT July wheat futures 2.87 1/2), CBT July 310 wheat calls were trading for about 10 cents/bu. Today, futures CBT July wheat traded at $2.86/bu (mid session Mar. 22) and July 310 calls would likely trade for about 8 cents/bu. Futures prices are very similar between the two periods but calls have declined 2 cents/bu (approx). The reason is six weeks less time to expiry. Should you be buying calls in here? A lot depends your market outlook. My thoughts are to be patient. As indicated by Tom and Brenda, the long term outlook for wheat is optimistic. Short term, the market is focusing on the large stocks in the US/EU. I suspect CBT July wheat futures has potential to dip back into the $2.65 to $2.75/bu area (review the July CBT wheat chart). At this time, you could buy CBT wheat calls at lower strike prices (eg. July 290/July 300 calls) for similar premiums to today's July 310. Two concepts here. Be ready to buy calls on dips. Second, calls are like insurance in that you want to get the lowest strike price possible (in the insurance case, best coverage) at a low premium. A long winded answer to suggest patience on any wheat call purchases. I would be tempted to wait to later in the spring/summer before jumping in.

[brian]

An update on options. Current CBT July wheat futures prices have slipped to $2.77/bu (noon CST), down about a dime from Mar. 22 note. CBT July 310 wheat calls are currently trading at about 8 cents/bu, unchanged from the last message. How can futures slip 10 cents/bu but have calls retain their value? The answer is volatility. Current volatilities are in the 28 to 30 % range versus a quieter market range of about 15%. The market is very nervous and unsure of future price direction. Somebody who would write the call today (i.e. sell you the price insurance you want) will want a high premium. For the people who write calls (i.e. sell them), the current market is the equivalent to selling insurance to an 18 year boy with a 300 horsepower pickup and a bad driving record. A lower volatility market is the same as selling insurance to 40 year owner of a Cavalier/Escort/Neon with a good driving record. If you are serious about buying calls, you should be watching the market both with the idea that prices have potential to slip further and a reduction in the level of volatility in the market. The strategy is to buy calls when the market is down and things are boring. I will highlight opportunities as we go along in the marketing area.

[brian]

Made a mistake. I managed to grab the CBT May wheat contract versus the July. July closed today at $2.86. 1/4. (May closed at 2.76 3/4). Not a big change from Mar. 22. CBT July 310 wheat calls closed at 7 7/8 - again not a big change from the Mar. 22. The other issues in the comments still apply. Volatility is high right so options are relatively high. The market still has potential to slip lower. I would remain patient in buying calls. As a sidelight, one of the best processes for learning options is to pick a specific contract month and monitor changes in options values relative to changes in the futures side the way we are in this discussion area.

[brian]

Update time on CBT July wheat options. CBT July contract futures prices closed today (Apr. 12) at 269 1/4/bu, down 17 cents/bu from the last Apr. 1 comment (I printed it out this time to make sure I got the right contract month). CBT July 310 wheat calls closed today at 2 7/8 cents/bu, down from 7 7/8 cents/bu or about 5 cents. CBT July 280 wheat calls could be had today for 9 cents/bu, just over a penny more than what I would have paid for CBT July 310 just over a week ago. Should I buy July wheat calls right now? What strike price would I use? How much would I have lost on my call if I had buy a July 310 on Apr. 1?

[brian]

Update time. July CBT wheat closed at 2.65 3/4 today (Apr.23), down 3 1/2 cents/bu from Apr. 12. CBT July 310 wheat calls were valued at 1 7/8 cents/bu, down a penny from 11 days ago. July 280 calls would have cost you 6 3/4 cents, down 2 1/4 cents/bu from Apr.12. May options have expired so July is now the front month (closest option contract). You should likely start following the next month. Sept. CBT 310 wheat calls would cost about 8 cents (Sept. futures closed today at 2.75 1/2). Should a person look at buying calls now? Has anyone looked at the grain company options type contracts like UGG CWB rally master?