New Crop Options Strategies

[charliep]

Saw the following in Ken Ball/Union Securities morning update and thought I would pass it along for discussion. Note many of you have highlighted using puts in the past with current rally maybe allowing some opportunities.

CALL OPTIONS TO SET UP SELLING ON SPRING WEATHER RALLIES

It may be time to start looking at picking off some call options in a
cross section of the grain and oilseed markets, to set up crop pricing
on any early season weather rallies. If you can get a selection of
out-of-the-money calls in place at some reasonable costs, then selling
to capture any spring rallies later becomes a much easier task, as the
calls will keep you in the market if prices keep pushing higher. Price
action in all grain and oilseed markets is sideways right now, with
little impetus for major direction. We can likely wait for some
sell-offs to look at call purchases over the next few months.

[timm]

Get cottonpicken back on here

[Choice2U]

If you're into speculation, this is a valid move for you. Cotton pointed out in an earlier thread, 80% of options expire worthless so you better be on the right side of the weather bet. If your new to options, I would eliminate the speculation component and tie options to production decisions ie. puts on anticipated production (locking in a profit during a rally) and on the production over and above any locked-in tonnage. If the market goes up, you're put expires worthless but you have the product to sell at the higher price. Calls should be used on production sold this fall if you think the price is going up.

[charliep]

Agree with your analysis and your/cottons comment on most options expiring worthless. They are a form of insurance however and meant to provide protection against lower prices (for a cost). Puts are likely the most appropriate for crop producers.

On the call thoughts, would note that can provide an opportunity to capture a good price (including basis and currency) and still hold open the ability to participate in summer rallies. An example is a FPC. If you think a $13 to $14 under basis is good and/or you think the loonie could increase above the 82 cent level, you might sign an fpc contract to lock in both. A call would hold open your upside potential.

They can also be a lottery ticket on a weather market this summer - you see the tight corn S&D and what to hold an out of the money call just in case.

[mbratrud]

I agree Put options are the only options that make sense from a grower perspective. Even your last comment Charlie a put option could be used to acheive the same thing.
We just need more liquidity and put options would be a great tool.