Agricultural Marketing ECON 337: Agricultural Marketing Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356 Chad Hart Associate Professor chart@iastate.edu 515-294-9911 1

Option Premiums Can be divided into two sections: Intrinsic value What is the option worth today? Time value How much time is left on the option? Intrinsic value depends on the futures price and the strike price of the option. Time value depends on the length of time in the option and the price volatility in the market.

Example Start with an July 2014 corn put option @ $4.50 per bushel Day Futures Price Option Premium Intrinsic Value Time Value 1 $4.47 $0.23 $0.03 $0.20 2 $4.53 $0.22 $0.00 3 $4.52 4 $4.54 5 $4.56 $0.21

Combination Strategies Option fence Buy put and sell call Put spread Buy In-the-money or At-the-money put and sell Out-of-the-money put

Option Returns in Fence Buy Put Option July 2014 Corn @ $4.00 Premium = $0.05 Sell Call Option July 2014 Corn @ $5.00 Premium = $0.09125

Fence for Speculator Buy Put Option July 2014 Corn @ $4.00 Premium = $0.05 Sell Call Option July 2014 Corn @ $5.00 Premium = $0.09125

Fence for Hedger Buy Put Option July 2014 Corn @ $4.00 Premium = $0.05 Sell Call Option July 2014 Corn @ $5.00 Premium = $0.09125

Option Returns in Spread Buy Put Option July 2014 Corn @ $5.00 Premium = $0.535 Sell Put Option July 2014 Corn @ $3.50 Premium = $0.0075

Spread for Speculator Buy Put Option July 2014 Corn @ $5.00 Premium = $0.535 Sell Put Option July 2014 Corn @ $3.50 Premium = $0.0075

Spread for Hedger Sell Put Option July 2014 Corn @ $3.50 Premium = $0.0075 Buy Put Option July 2014 Corn @ $5.00 Premium = $0.535

Combination Strategies Butterfly Straddle Condor Strangle These positions can be flipped

Condor Sell Call @ $6.00 Premium = $0.01125 Sell Put @ $3.00 Buy Put @ $4.00 Premium = $0.05 Buy Call @ $5.00 Premium = $0.09125

Condor for Hedger

The 4 Basic Graphs for Options Buy a put Sell a put Buy a call Sell a call

Class web site: See you in lab, Heady 68. http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2014/ See you in lab, Heady 68.