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Respect short-dated options contracts

03/07/2014 @ 2:35pm

In the search to provide tools useful to the marketplace, the Chicago Mercantile Exchange introduced short-dated options for corn, soybeans and wheat just over a year ago. While these tools may have many advantages, they also need to be treated with respect like any other tool.

Simply put, short-dated options are options which expire sooner than traditional options and are based on December futures for corn, November futures for soybeans, and July futures for wheat. As an example, if you purchase a July short-dated December put option, you are purchasing the right to sell December futures between now and the expiration date which is in June. The advantage to you as a buyer of this option is that you are spending less on time value than a traditional put. Your belief is that the market will make a move in your direction sooner than later. Therefore, spending less money for time to own a December put option that expires sooner (short dated) than November(traditional) may make sense for you. Yet, on the other hand, our concern is that producers make look at a July or September short-dated option as attractive due to cost and not buy the long-term downside protection they may really need, which is often into the harvest season.

When might someone want to use a short-dated option? As indicated before,you would want to use this if you choose to cover a shorter period of time. They may be desirable in front of critical USDA reports or what could be significant weather changes in the very short term. On the flip side, the insurer (the writer of these options) may prefer to sell short-dated options in an attempt to take advantage of more rapid time value depreciation. In these circumstances, it may be advantageous for you to buy more short-dated options with the same amount of cash flow budgeted for traditional December options.

Regardless of what tools you use, keep in mind that they are simply methods to help you achieve the management of opportunities or risk. Utilize tools with caution and care and with the right perspective. Understand the function of the tool. So often we hear producers grumble that they lost money on put options. As a flooring mechanism, your put option establishes the right to sell but not the obligation. This provides you the luxury of price improvement, yet the peace of mind knowing that you have a floor. Now the question is: How much time do you want to buy or sell?


If you have questions or comments, or would like help implementing strategy for the year ahead, please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.


Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.


Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider

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