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The Value in Using Options as a Marketing Tool

I spent February 7 and the first three days of this week on the road traveling with extension personnel doing marketing meetings in several towns. I always come away from these meetings motivated to try new things and full of ideas on how to make the meetings more valuable for those who make a living raising grain on their farms.

One of the ideas that came from the audience at the Beatrice, Nebraska, meeting was the fact that most farmers know very little about options and their use as a marketing tool. The staff person from University of Nebraska-Lincoln indicated that there was a good possibility that the ag economist extension personnel would be doing options workshops next year. I replied that presenting training on options was a worthy goal and one that will probably generate a lot of interest among the farmers.

Having said that, I got my first exposure back in the 1980s, shortly after options were made legal to trade on the Board of Trade. A car load of farmers from my area drove to Table Rock, Nebraska, to hear a speaker discuss the topic of options for ag marketing. It did not take long to realize that the speaker did not have any idea how options work or how they could be used by an average farmer. After several minutes of embarrassing silence, I offered to rescue the meeting and explain the topic that was promised to the audience.

If I sound arrogant in promoting myself as an expert on options, be aware that I learned options by trading them on the stock market. I also hedged live cattle on the Mercantile Exchange as part of my cattle feeding operation. Those experiences at least qualified me as having some exposure to hedging in the business. At least I had enough training that I did not lose huge amounts of money in the process.

Early on it was easy to make money by buying either call options or put options and holding them to expiration. Trading was thin and traders were inexperienced. Option premiums were cheap. The cheap options did not last long. It did not take long for the premiums to get expensive enough that profits were difficult to realize using common strategies. By then selling options started to look attractive for those who make a living by selling, not buying, calls and puts. Such strategies require a totally different approach to risk management.

It is easy to make money by selling options. It you are wrong your premium money can disappear unbelievably fast. Trading in options is not for the inexperienced or faint of heart. It can be a flexible tool for those who take the time to learn it. Buying call options to protect futures hedges makes a lot of sense if done in a timely manner. I hope that the University of Nebraska undertakes the task of training Nebraska farmers in the use of this tool.


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