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Call Upon a Call Option, Analyst Says
Call options for grains and oilseeds are instruments traded at the Chicago Board of Trade. For this Perspective, we will concentrate on corn calls.
The purchaser of a call option, for a fixed cost (called a premium), owns the right (not the obligation) to be long futures contracts. This is a debt instrument that has high leverage value. That is, for a fixed premium, you are able to convert this instrument into a long futures position if you choose, and yet are not obligated to exercise that right.
An analogy to understand buying calls is buying insurance against higher futures prices. Why would a farmer buy call options?
First let’s define farmer. A farmer is someone who produces an agricultural commodity. For our example, let’s say this is a farmer who produces corn.
A corn farmer would purchase a call option to retain ownership of crop they have sold, or to provide confidence in making future sales.
Reowning is a simple notion: You sell the crop and buy a call to stay in the market. Buying calls for future sales can be somewhat tricky. The idea is that, by owning the call and the corn, you have confidence to pull the trigger on sales when prices rally to your target.
Sometimes these are called courage calls. The discipline to make sales becomes critical, as emotion elevates during high-volatility windows.
Without the use of a call, emotion and market volatility may be telling you to not sell, because the trend is turning higher. By selling at a designated target and having reownership already in place, much of the emotion could be removed, and the selling process becomes mechanical.
For the farmer who buys feed, such as a dairy producer or feedlot manager, purchasing call options is a way to shift risk with a quantified cost. If you own a dairy and you are concerned about higher corn prices due to summer weather, you may want to buy your call prior to June 1, when the calls are likely to be less expensive.
Yes, these are powerful tools that can allow you to maintain discipline in your marketing, as well as shift risk. Every farmer should have a must-know file of tools to be used in their business. Knowing when and how to use call options could be critical to the success of your operation.
If you have questions or comments, contact Top Farmer 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.
Lisa Heder Support Services Team Lead | Stewart-Peterson Office: 800.334.9779 | Fax: 262.334.6225 email@example.com
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Stewart-Peterson refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this email is sent on behalf of the company or companies providing the services discussed in the email.