Options

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GRAIN MARKETING AE 423
Chapter 4
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Major Options Exchanges in U.S.

• Chicago Board of Trade
• Chicago Mercantile Exchange
• Kansas City Board of Trade
• New York Cotton Exchange
• Coffee, Sugar, and Cocoa Exchange
• New York Mercantile Exchange

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What is an Option?
A Contract between two parties that conveys a
right but not an obligation to Buy or Sell a
specific commodity at a specific price within a
specific time period for a premium.
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Types of Options

• Call - right to buy

• Put - right to sell

Sell(Short Obligation to buy
Buy(Long) Right to sell
Buy(Long) Right to buy
Sell(Short) Obligation to sell
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Option Alternatives

• Expire
• Exercise
• Offset

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Components of Option Premium

• Intrinsic value
• Time Value
• TOTAL VALUE

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Components of an Option Premium

• Intrinsic Value
• difference between strike price (SP) and
  underlying futures price (FP)
• for a Put when SP gt FP
• for a Call when SP lt FP
• Time Value (Extrinsic Value)
• length of time to expiration

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Options that are

• In-the-money
• have intrinsic value
• Out-of-the-money
• have no intrinsic value

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Time Value of Options
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Soybean Option QuotesJanuary 7 Settlement
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Intrinsic and Extrinsic Values for Different
Strike Prices of Call Option
Source Wilson
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Option Premiums for Different Maturities
Source Wilson
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What is an Options Delta?
Delta is the measurement of movement in an
options premium relative to a move in the price
of the underlying futures. Delta is about 0.5
for an option at- the- money. Delta is near or
equal to 1.0 for an option deep
in-the-money. Delta approaches or is equal to
0.0 as an option moves out-of-the-money.
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Option Premiums Strike Prices
Source Wilson
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Minimum Selling Price (MSP)Buying a Put Option
for Corn

• Strike Price 3.00
• at-the-money
• Expected Basis -.20
• Put Option Premium -.18
• MSP 2.62

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Buying Put Option Price Declines
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Buying Put Option Price Increase
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Comparing Marketing Alternatives
Net Farm Price
December Futures Price
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Maximum Buying Price (MBP)Buying a Call Option
for Corn

• Strike Price 2.70
• at-the-money
• Expected Basis -.10
• Call Option Premium .15
• MBP 2.75

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Buying Call Option Price Decline
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Buying Call Option Price Increase
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Buying Call Option Price Increase
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Comparing Marketing Alternatives
Net Price Paid for Feed
December Futures Price for Corn
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Comparing Marketing Alternatives
Your net return if you
Write call with strike price of
Buy Put _at_7.50 for .30
If futures price at expiration is
7.25 7.50 7.75 8.00
Premiums
Hedge 7.50
Cash Market
Source CBOT