I spent 27 years on the trading floor of the Chicago Board of Trade in the wheat options pit. I executed options trades for big customers in busy markets. I saw brave men handle massive market exposure daily. Some had million-dollar backers. Others had only the minimum funds required and put their net worth on the line every time they stepped into the raucous arenas (corn, beans, wheat) of open outcry trading that set Chicago’s futures and options markets apart from the rest the world.
Risk. It’s something these people embraced with fervent enthusiasm, but also with unmistaken respect. Because no amount of money or research can save you from Mr. Market. He is always right.
As an advisor, I provide suggestions for producers. They ultimately make the decision about how to grow, market, and sell their valuable crops.
The goal is to maximize your output while utilizing your inputs in the most efficient manner, all the while staying focused on risk against weather, direction, macro news, and things that you may not have even considered. Pick any of the number of events of the last year and a half.
In my experience, I learned one overarching fact: no one knows where the market is going. The bold and the daring will stand and make markets as speculators and provide the valuable liquidity necessary for conducting trade. They are truly appreciated. But producers are for the most part in the market to manage the crops that they spend their life’s work growing.
Our goal as advisors is to empower the farmer to seize the opportunities that price swings throughout the entire year can provide. You should be able to reward a rally the likes of which we’ve seen this year without “sellers’ remorse,” or the feeling that you sold too soon or too late. That’s why we suggest getting your risk on paper with a call or call spread. Just remember: it’s a hedge, not a speculative play. It keeps you in the game.
The same mentality applies to protecting your unsold bushels with put options. They are there for you as a hedge, not a speculative position. What is the goal of buying a put when you are going to be long on the field? Lose the money you paid for the put (think of it as insurance), and get paid on your bushels in the field. Nothing beats a good cash sale!
Stop trading your hedges like a spec account. Ultimately, what happens in the cash market is the trade that impacts your bottom line more than anything else you will do.
No one has a crystal ball. But I do know that puts gain value when the futures go down and calls gain value when the futures go up. And the market moves around all year long. Rallies must be rewarded, and breaks must be pounced upon. You shouldn’t be worried that you didn’t sell beans at $15.85. You should be concerned that you might be sitting on your hands watching the beans go from $14.85 to $12.00 and you didn’t do anything.
When you hedge with options, you are risking pennies. When you allow your production to lay vulnerable to the whims of the market, you’re risking dollars. Keep your risk in perspective.
Contact Advance Trading at (800) 747-9021 or go to www.advance-trading.com.
Information provided may include opinions of the author and is subject to the following disclosures:
The risk of trading futures and options can be substantial. All information, publications, and material used and distributed by Advance Trading Inc. shall be construed as a solicitation. ATI does not maintain an independent research department as defined in CFTC Regulation 1.71. Information obtained from third-party sources is believed to be reliable, but its accuracy is not guaranteed by Advance Trading Inc. Past performance is not necessarily indicative of future results.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.