Using Agricultural Options Agriculture Option u An option

Agriculture Option u An option is the right, but not the obligation to buy

CALL Option Corn u. Option to BUY a futures contract u. Used Futures to

PUT Option res Corn Futu u. Option to SELL a futures contract u. Used

u. A call is not an opposite transaction to a put u Trading a

STRIKE PRICE u The predetermined futures price at which the futures contract may be

Alternatives for an option buyer u Do nothing - Let the option expire u

A little Option jargon u “in the money” u “at the money” u “out

INTRINSIC VALUE u The dollar value (return) that could be realized if an option

INTRINSIC VALUE u If a corn call option has a strike price of $2.

IN-THE-MONEY u If an option has intrinsic value, it is said to be inthe-money.

OUT-OF-THE-MONEY u If an option has no intrinsic value, it is said to be

Slides: 15

Download presentation

Using Agricultural Options

Agriculture Option u An option is the right, but not the obligation to buy or sell a futures contract u predetermined price u anytime within a specified time period.

CALL Option Corn u. Option to BUY a futures contract u. Used Futures to establish maximum buying prices

PUT Option res Corn Futu u. Option to SELL a futures contract u. Used prices to set minimum sales

u. A call is not an opposite transaction to a put u Trading a call does not involve a put and trading a put does not involve a call u Calls and Puts are not separate sides of the same contract

PREMIUM u The amount paid for an option

STRIKE PRICE u The predetermined futures price at which the futures contract may be bought or sold u Listed in multiples of $. 25 for soybeans, $. 10 for corn (these can change)

Alternatives for an option buyer u Do nothing - Let the option expire u Exercise the option u Sell the option to someone else- liquidate

A little Option jargon u “in the money” u “at the money” u “out of the money”

INTRINSIC VALUE u The dollar value (return) that could be realized if an option were exercised or liquidated at a given strike price. u Call option is in-the-money if the strike price is below the futures price. u A put option has intrinsic value if the strike price is above the futures price.

INTRINSIC VALUE u If a corn call option has a strike price of $2. 10 and the underlying futures price is $2. 18, the call option has an intrinsic value or is in-the-money by 8 cents. u If a soybean put option has a strike price of $5. 25 and the underlying futures price is $5. 15, the put option has an intrinsic value of 10 cents.

IN-THE-MONEY u If an option has intrinsic value, it is said to be inthe-money. u· Put Option - If the strike price (of a specific contract) is above the current futures price, the put has value and is in-the-money. u· Call Option - If the strike price is below the current future price (of a specific contract) the call has value and is in-the-money.

OUT-OF-THE-MONEY u If an option has no intrinsic value, it is said to be out-of-the-money. An option that is out-of-themoney would not be worthwhile to exercise. u · Put Option - If the strike price (of a specific contract) is below the current futures price the put has no value and is out-of-the-money. u · Call Option - If the strike price is above the current futures price (of a specific contract) the call has no value and is out-of-the-money.

u CBOT Options