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 December 2016 corn put option @ $3.90 per bushel Day Futures Price Option Premium Intrinsic Value Time Value 1 $3.92 $0.3025 $0.00 2 $3.94 $0.29 3 $3.93 $0.295 4 $3.9125 $0.3075 5 $3.8925 $0.31625 $0.0075 $0.30875
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 a Fence Buy Put Option Dec. 2016 Corn @ $3.50 Premium = $0.12375 Sell Call Option Dec. 2016 Corn @ $4.50 Premium = $0.14125
Fence for Speculator Buy Put Option Dec. 2016 Corn @ $3.50 Premium = $0.12375 Sell Call Option Dec. 2016 Corn @ $4.50 Premium = $0.14125
Fence for Hedger Buy Put Option Dec. 2016 Corn @ $3.50 Premium = $0.12375 Sell Call Option Dec. 2016 Corn @ $4.50 Premium = $0.14125
Option Returns in Spread Buy Put Option Dec. 2016 Corn @ $4.50 Premium = $0.74625 Sell Put Option Dec. 2016 Corn @ $3.50 Premium = $0.12375
Spread for Speculator Sell Put Option Dec. 2016 Corn @ $3.50 Premium = $0.12375 Buy Put Option Dec. 2016 Corn @ $4.50 Premium = $0.74625
Spread for Hedger Sell Put Option Dec. 2016 Corn @ $3.50 Premium = $0.12375 Buy Put Option Dec. 2016 Corn @ $4.50 Premium = $0.74625
Combination Strategies Butterfly Straddle Condor Strangle These positions can be flipped
Condor Sell Put @ $3.00 Premium = $0.02 Sell Call @ $6.00 Buy Put @ $4.00 Premium = $0.37875 Buy Call @ $5.00 Premium = $0.07625
Condor for Hedger
The 4 Basic Graphs for Options Buy a put Sell a put Buy a call Sell a call
Class web site: Lab in Heady 68. http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2016/ Lab in Heady 68.