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The Case for Short-Dated Options

Short-dated options, introduced by the exchange a few years ago, are gaining more relevance and importance as a tool you might employ to help shift risk or manage opportunity. As with any marketing tool, there are pros and cons that need to be measured. Full visibility of how short-dated options work (whether purchased or sold) and the associated risks are critical to understand for proper implementation. A big benefit is that short-dated options can provide farmers an opportunity to reduce cost. They may be useful for such events as upcoming USDA reports, near-term weather events, or any other situation where protection for a shorter period of time may be warranted. Because you’re buying a shorter time period of coverage, they cost less and you’ll save money (relative to a traditional option). As an example, as the end of March approaches, concerns over the very important acreage and quarterly stocks reports will likely have many using short-dated options to shift risk.
Let’s first explain what a short-dated option is and how it works. The term short-dated refers to a shorter window before the option’s last trading day, otherwise known as option expiration. A traditional (or long-dated) option has a longer window before the option expires. In corn, traditional December calls and puts expire in late November. In soybeans, traditional November calls and puts expire in late October. Short-dated options have the same underlying futures contract (or instrument). The underlying futures contract for corn is December, and the underlying futures contract for soybeans is November. With short-dated, there are fewer days of coverage. As an example, a July short-dated option will expire in late June, even though the underlying futures contract is December. Short-dated months available are April, May, June, July, and September.
An example of when one may use a short-dated put will be toward the end of March, prior to the release of the Acreage and Stocks reports. If you want to protect against lower price potential, you might purchase a May short-dated put. You will pay much less for time value than a traditional December put, because the May corn short-dated put expires on April 21.
As with any tool, make sure you are aware of the risks, the potential, and other variables such as liquidity when using short-dated options. Know what happens if you exercise your right to convert your option into a futures. If you are an option seller, be aware of what happens if you are exercised against.
If you need help or want to learn more about short-dated options, contact Bryan at Top Farmer Intelligence (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.

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