September 23, 2020
Life is often about timing, and call options are no different. With the power of hindsight, we know that If you sold part of your soybean crop ahead this year, this was the year to re-own those sold bushels on paper. The chart below shows how the cost to own a $9 soybean call has changed in the last year. You can see how it fluctuated most of the year between 20 and 30 cents, dipping down to a low of 10 cents last month before abruptly changing course. Within about six weeks, those same 10 cent call options were trading as high as 140 cents. It is unlikely that someone would buy at the low and sell at the absolute high, but even if someone had paid 30 cents for the call means they could have added as much as 90 cents to their cash price in a short amount of time.
Factors to consider
Call options have gotten a bad rap some years . . . usually when they don’t pay out the way we want them to. But there are several factors to consider when purchasing those call options. The strike price is the price at which the underlying futures contract is bought or sold. How much this strike price is above or below (or at) the current futures prices dramatically impacts the value of that option. This is referred to as the intrinsic value. A $9 soybean call is now well “in-the-money” and so its value is much higher than just a short time ago when November beans traded at $8.65 last month. Last month, that same $9 soybean call was “out-of-the money,” therefore its value traded much lower.
The best time to purchase call options (or put options for that matter) are when prices reach extremes. In the case of owning call options, we want the price to go up as they are more reasonably priced when the market is trading at the bottom of its range. This was exactly the case for soybeans this year as the best time to load up on calls was when they were trading around $8.50. Of course, there are no guarantees that prices would recover, so those calls could have just as well expired worthless or at the very least diminished in value.
The same is true of put options. If the best time to buy calls is when futures prices are at the bottom of the range, then the best time to buy put options are when prices are at the top part of their range. Now that we are trading near the top of a four-year range in soybeans, an argument could be made to begin liquidating those calls and go hunting for bargains on puts. This could be a little premature as I would like to see the market attempt to test the high of $10.80 made back in January 2017. For that to happen, we will likely need a combination of more bearish harvest results from the field as well as continued buying from China.
However, bear in mind the long-term implications. The market is calling for farmers to plant more soybeans next year and if current price ratios continue, they will likely respond. Brazil has already signaled that it will increase acres next year, adding another 3 million acres on top of what was already a record planted area. If the U.S. does the same, this rally could prove unsustainable long term.
Matthew Kruse is president of Commstock Investments. He can be reached at [email protected] or call 712-227-1110.
Futures trading involves risk. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that CommStock Investments believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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