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Corn+Soybean Digest

Call Options 101 | Help Capture Rallies on Grain Already Contracted


Like corn and soybean futures and put options, calls are offered through the CBOT. You have to search a little more to find options prices, but they’re there. Put and call option prices premiums are listed, based on various futures quotes. According to CME, buying a call option “gives you the right, but not the obligation, to buy a product on the underlying futures contract at a specific price. The underlying futures contract is the one with the same delivery month as the option.”

 The call market is commonly used for price protection by processors, exporters and livestock-feeding operations to insure a maximum purchasing price for grain or soybean meal. For farmers, calls are often tools to cover increases in the market.

Bob Wisner, long-time grain marketing guru for Iowa State University and professor emeritus, says calls can enable growers to sell grain at harvest – but retain the opportunity to benefit from rising prices.

“Producers can offset harvest sales by buying call options,” Wisner says. “If futures prices rise significantly above the initial strike price, the options contracts should increase in value. If prices decline, the producer would lose only the initial premium payment plus a small brokerage charge.”

An at-the-money call or put option strike price is equal to the particular month’s futures price. Typically, as the call option strike price increases, the cost for buying the option decreases, just the opposite of a put option.

For example, in mid-January, an at-the-money December 2012 $5.90 corn call option cost about 58¢/bu.  But an out-of-the-money $7 December call cost about 25¢/bu. A $7.50 call cost about 16¢.  If the futures price and thus the call strike price increased from the $5.90 level, the value of the option would likely increase.

If you have corn cash contracted at the $5.90 price, that is your floor price, less any basis. If the market takes off, you can still be in the market for higher prices with a call option in place.

Wisner says few expected 2011 to see a second straight year of shorter corn crops due to dry weather. But it happened. And it’s showing up in shorter ending stocks. A reduction in 2012 expected yields could also create a situation in which prices increase strongly in the spring and summer or even later.

“Three consecutive years of a shorter crop is unlikely, but the forecast is for dry weather in the northwest Corn Belt,” Wisner says. “The corn market could explode on the upside with another year of serious U.S. or South American weather problems. A call option would help growers take advantage of that upside market.”

He says the $7.50 put, bought at about 16¢/bu., could be worth 50¢ if the market would rise to $8 or higher. “If it reaches $8.50 near the contract delivery month, that call option could be worth $1/bu.,” he says.

Wisner says growers should consider using call options that are in months that normally expire following potential weather problems. “A September option would expire about Aug. 20,” he says. “A December would expire about Nov. 20.” He adds that growers most likely would sell back the option to take the added premium before its expiration.

He encourages growers to evaluate their risk coverage needs before using call or put options or other marketing tools. “The strike price a producer uses depends on his or her risk situation,” he concludes. “Certainly, for someone looking at the possibility of using calls to protect against a weather market, that $7.50 would be a possibility at its low cost (16¢ in mid-January).”

Remember that futures and options prices can change by the minute, so keep an eye on the quote board as often as possible if a strong bull market should develop. 

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