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Roy SmithMore on options

Agriculture.com Staff 02/09/2007 @ 9:42am

In the "Launching Your Marketing Plan" workshops that I have been doing this winter, there is an option component in both the training and the computer simulation game. This is in response to numerous requests for more information on options we received from evaluations of previous year's workshops.

When we decided to include options, I knew that eventually there would be someone in one of the meetings who would take exception to the usefulness of options in a marketing plan. This week it happened! A farmer commented that there was no way he was going to get involved in the option market because options always lose money.

I will admit that this is the most common comment I get at meetings when the subject of options comes up. As I listened to this individual tell his theory on options, I could guess as to what might have happened to cause his sour attitude. I think that he probably was talked into selling grain at harvest time and replacing it with call options. As mentioned last week, that strategy seldom is profitable.

Replacing sold grain with call options works best when the basis is very good and there is no carry or negative carry between the current futures month and deferred futures months. It is very unusual to have both of those at the same time.

Generally, the basis at harvest is wider than it will be later in the winter and following spring. Also, the spread between December and July corn or November and July soybean futures is fairly large. In effect, if you sell cash at harvest and replace with call options, you are selling low and buying high. This is not a formula for good odds of success in any market.

As I said in previous columns, I think that this will be a year when options will be a useful tool for dealing with wild markets. The concept of limiting risk to the premium paid will be a great way to deal with the unknowns of volatile markets. Premiums will be high. My experience over more than 20 years of using options is that when the premiums are high, the profit potential is also high.

I am going to be evaluating the cost of put option premiums in the next month to get my old crop corn and at least part of my new crop corn covered with put options before the March crop report. At this pojnt, there has been no incentive to purchase options because the premiums have dropped as futures prices rose and time passed. At some point, it will no longer be wise to wait. If I buy the puts right, I can pay one premium and be in position to wait out any positive surprise that might come along with little down side risk.

In the "Launching Your Marketing Plan" workshops that I have been doing this winter, there is an option component in both the training and the computer simulation game. This is in response to numerous requests for more information on options we received from evaluations of previous year's workshops.

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