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Revisiting short-dated options

When might you buy a short-dated option?

For several years now, the Chicago Board of Trade has offered what is known as short-dated options. These can be valuable marketing tools for producers, especially in front of significant news events or weather forecasts that could dramatically create changes to prices in a very near-term window of time. The term short-dated refers to a smaller amount of time as compared with a traditional option.

To better explain, the December corn traditional option has an expiration date near the end of November and is, of course, based on the December futures contract. A short-dated option in corn expires in the month prior to the calendar contract, however, it’s based a traditional contract: corn based on December futures; soybeans based on November futures. An example: A short-dated August corn put expires near the end of July, and is based off the December futures contract. (If your option is exercised, you are assigned a December futures contract.) A short-dated August soybean put expires near the end of July, and is based off the November futures contract. (If your option is exercised, you are assigned a November futures contract.)

When might you buy a short-dated option? The most likely scenarios are in front of USDA reports or some other developing event that could have influence on futures prices. Historically, during certain times of the year, USDA reports can dramatically move prices. In 2019, after the June Stocks and Acreage reports were released, corn futures dropped sharply, as the trade was looking for supportive numbers, yet the reports didn’t reflect that sentiment. For a producer who would like protection on new-crop corn for the June 30 Stocks and Acreage reports this year, you could purchase August or September short-dated puts. The rationale is to simply buy less time value and still have protection against new crop pricing. The short-dated option can be exercised into a futures contract. In the case of corn, this would be December. In the case for soybeans, the exercise (converting the option to a futures contract) would be November. 

Let’s use one more example. Let’s say you aggressively forward sold corn in spring. In late May, you are concerned that dry weather could reduce the crop. It may be advantageous for you to spend fewer dollars on a short-dated option to cover your forward sales for, say, the next 30 days. You would most likely purchase either a July or August short-dated call. You’re spending less compared with buying a traditional call because you’re not paying for as much time. Yet, you have the protection when you most need it. Let’s say prices skyrocket. Your calls can be converted (exercised) into long December futures. Now you have coverage on your forward contracts, and you have time to hold this contract until December.

Short-dated options are just one more tool in your tool chest of marketing alternatives. The big advantage with the short-dated options is reduced cost, as you are buying less time. Become familiar with these tools; they could be valuable resources to implement for your marketing strategy.  As with any tool, make sure you understand all the ramifications before you enter the position. Asking good questions and developing a thorough understanding of marketing tools is paramount to effective risk management. It is one of the many hats you wear. Take a few minutes and understand this option so that you can incorporate them in your marketing strategy at the right time and for the right reason. 

If you have questions or would like to learn how to implement short-dated options in your marketing, call 800-334-9779. Ask for Bryan Doherty, extension 444.

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