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Corn+Soybean Digest

Serial Options Extend Crop Price Coverage

The Chicago Board of Trade (CBOT) has introduced a new crop price protection tool that lets hedgers manage short-term risk at a low cost.

Serial options may sound at first like new breakfast food choices. They're actually short-term futures-contract options that work much like standard futures options.

The big difference, says David Lehman of CBOT, is that standard option contracts are traded for months in which commodity contracts expire, and serial options trade for the other months.

CBOT corn contracts trade for December, March, May, July and September. So do standard option contracts. That means corn serial option contract months are January, February, April, June, August, October and November.

Soybean standard option contract months include January, March, May, July, August, September and November. So soybean serial option contracts will be traded for February, April, June, October and December.

Another difference is that serial options trade for approximately 30 days only.

They begin trading five days before the expiration of a standard option contract or the current serial option contract.

Here's how it works: The July standard corn option contract expires June 19 (the last Friday that precedes by at least five business days the last business day of the month preceding the option month). So trading on the August serial option contract will open on Monday, June 15.

"This five-day overlap gives traders time to roll a position with a July option contract forward to the August serial option contract," Lehman explains.

Both the September standard corn option contract and the August serial corn option contract will be based on the September futures contract price.

The trader could take a position with a standard September option contract instead. The hope is that the August serial option will allow traders and hedgers a shorter-term option to cover risk, but with a lower premium based on the contract's time value, says Lehman.

Because serials trade for just a month, they're a logical tool for short-term protection or market participation, he adds. A producer can use a serial option contract to extend a hedge month-by-month.

For example, suppose you establish a preharvest short hedge for corn using a December standard option. At harvest (early in November), you decide to hold corn to wait for basis recovery, but still want CBOT coverage for another month. With standard option contracts, you'd need to roll your position into March.

Instead, you can roll your current option position into a January serial option (trading begins Nov. 16 and expires Dec. 19.)

The risk protection is the same. But, because the time frame is shorter for the serial option, the premium should be lower.

CBOT's Eugene Kunda calculates that an at-the-money March '99 option bought Nov. 16 will carry a 121/8 cents/bu premium, compared with just 63/8 cents/bu for the shorter-term January '99 serial option. That's a 53/4 cents/bu savings for the same price protection.

To learn more about serial options, contact your broker or call a CBOT ag product manager at 312-341-7955.

If you're online, look for more information on the CBOT Web site at

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