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Options Strategies

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Options Strategies Commodity Marketing Activity Chapter #6 – PowerPoint PPT presentation

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Title: Options Strategies


1
Options Strategies
  • Commodity Marketing Activity
  • Chapter 6

2
Option Premiums
  • EX corn put option premium .20
  • Corn contract 5,000 bu
  • Buyer of a corn put pays 1,000 (.20 x 5,000) to
    the seller of the put
  • If the option is worthless at the time he is
    ready to sell his corn, let it expire, and lose
    1,000
  • If the value is above 0, he can offset it by
    selling it back and MAY gain a profit
  • No Margin Deposit is required

3
Option Premiums
  • The Seller takes a greater risk
  • If Seller wants to OFFSET his put, he must buy
    the same futures contract
  • margin deposit required
  • to guarantee against any loss
  • Producer must pay a commission to broker to trade
    options

4
Hog Producer Example
  • In June, you expect to have 525 hogs ready for
    market in November
  • Local buyer offers 44.50/cwt, your target is
    higher
  • You want protection if prices fall, but want to
    take advantage if prices rise
  • First Step set your target price

5
Target Price
  • Strike Price 52.00 50.00 46.00
  • Prem. Cost 4.50 2.75 .75
  • Expect Basis -2.00 -2.00 -2.00
  • Target Price 45.50 45.25 43.25
  • You want to establish a minimum price of 45/cwt
  • You will need 3 options to protect 400 hogs
  • You have the 3,300 (2.75 x 400 per option) so
    you buy the 50 Dec. put option

6
Prices Fall
  • In November, futures fall to 45, local cash
    price is 43 (basis -2)
  • Dec 50 hog put option premium 5
  • You sell 3 Dec 50 puts and get the 5 (2.25/cwt
    profit)
  • You sell hogs locally for 43
  • Total income 43 2.25 45.25
  • 2,700 gain over cash market alone

7
Prices Rise
  • Futures rise to 49
  • Sell Dec 50 put for premium of 1 (loss of 1.75)
  • Cash Price 47
  • Total Income 47 - 1.75 45.25

8
Prices Rise
  • Futures price 52
  • Put Option is worthless
  • Let Option expire, lose 2.75
  • Sell hogs for 50
  • Total income 50 - 2.75 47.25

9
Storage Stragegy
  • November, you have 35,000 bu of corn
  • Cash price 2.20
  • Cash Forward Contract (July) 2.60
  • Storage cost is .28/bu
  • Want to lock in min. of 2.60 and benefit of
    price rises
  • Expected Basis -10 cents
  • Calculate Target Price

10
Target Price
  • Strike Price 3.00 2.90 2.80
  • Prem. Cost .22 .15 .10
  • Exp. Basis - .10 - .10 - .10
  • Target Price 2.68 2.65 2.60
  • Cur. Cash Pr. 2.20 2.20 2.20
  • Storage Gain .48 .45 .40

11
Action
  • You will need 7 option contracts
  • Cost of Premiums will be
  • .22 x 35,000 7,700 (3 strike) or
  • .15 x 35,000 5,250 (2.90 strike)
  • Based on cash flow, you choose 2.90 strike price

12
Prices Rise
  • In July, Futures price 3.10, and Cash Price
    3.00
  • July 290 put is worthless, let it expire, lose
    .15/bu
  • Sell corn for 3 in cash market
  • Total income 3.00 - .15 2.85 vs 2.30 if
    Forward Contract

13
Prices Fall
  • Futures price 2.35, cash 2.25
  • Sell July Corn 290 puts at higher premium (.55)
    for profit of .40/bu
  • Total income 2.25 .40 2.65

14
Purchasing Strategy
  • As a purchaser of feeder cattle, you buy CALL
    options to protect yourself against price
    increases while leaving yourself open to profit
    from price decreases
  • In July, you planning to buy 240 feeder cattle in
    December
  • Establish Target Price

15
Target Price
  • Strike Price 64.00 62.00 60.00
  • Prem. Cost 2.55 3.90 5.70
  • Expect Basis 1.00 1.00 1.00
  • Target Price 67.55 66.90 66.70
  • Target max. purchase price 67/cwt, rule out 64
    call option
  • Total premium for 4 calls
  • 3.90 x 440 cwt x 4 6,864 (62 call) or
  • 5.70 x 440 cwt x 4 10,032 (60 call)

16
Prices Fall
  • Buy 4 January feeder cattle 62 calls at 3.90/cwt
  • In December, futures price 58, cash price
    59
  • Jan. Calls are worthless, let expire, lose 6,864
  • Buy feeder cattle at 59/cwt
  • Total cost 59 3.90 62.90

17
Prices Rise
  • Futures price 70, cash price 71
  • Sell option for 8 (4.10 profit)
  • Buy cattle for 71
  • Total cost 71 - 4.10 66.90

18
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