What an Option
CHICAGO, Illinois (Agriculture.com)--Like a kid curiously watching a baseball game from outside the fence but wanting to play, I decided to dip my toes into trading commodities. The next question was what do I trade?
I decided to take the road less traveled, the oats options market. After all, I was out to learn more about what I write about, the farm markets. Though it started as simply a learning project, it wouldn't have bothered me to make a little money.
On March 8, 2011, I purchased a call option way out of the money. Specifically, it was a July $5.00 call at 6¢. On March 10, I purchased a Sept. $5.10 oats call option at 6¢ costing $300.00.
As many traders know, options contracts can reach their expiration date worthless. So, you hope to make your money before expiration.
Options vs. Futures
Because of the way trading options work, a one time payment to enter the contract vs. margin calls in a future contract based on market volatility, I wanted to avoid compounding costs from day-to-day price swings.
My broker advised that options can take the emotions out of trading. However, following the purchase of my first-ever contract, I found myself watching the oats market like a cat watching a mouse.
Though my options contracts were purchased in a fashion that's called 'way out of the money' (about $1.50), meaning it could be a long time before they reach the ultimate 'strike' prices, the hope was that government reports would surge the oats market higher.
Specifically, it was the USDA's March 31 Planting Intentions Report that was hoped would show decreasing oats acres, a bullish factor for the oats market.
To put this into perspective, the U.S., in recent years, has planted about 4.0 million oats acres vs. about 2.4 million this year. So, the decreasing acreage was favorable for a higher oats market.
Indeed, the March 31 Report showed a drop in oats acres, but not as steep as the trade expected.
Beginning of the End
At that point, I could have sold my 'call' options and suffered minimal loss. But, longterm fundamentals to support this market were in place and in the event of these bullish factors realized, I wanted to be there to collect on my first 'call' option trade.