Using Agricultural Options

Agriculture Option u An option is the right, but not the obligation to buy or sell a futures contract u predetermined price u anytime within a specified time period.

CALL Option u Option to BUY a futures contract u Used to establish maximum buying prices Corn Futures

PUT Option u Option to SELL a futures contract u Used to set minimum sales prices Corn Futures

u A call is not an opposite transaction to a put u Trading a call does not involve a put and trading a put does not involve a call u Calls and Puts are not separate sides of the same contract

PREMIUM u The amount paid for an option

STRIKE PRICE u The predetermined futures price at which the futures contract may be bought or sold u Listed in multiples of $.25 for soybeans, $.10 for corn (these can change)

Alternatives for an option buyer u Do nothing - Let the option expire u Exercise the option u Sell the option to someone else- liquidate

A little Option jargon u “in the money” u “at the money” u “out of the money”

INTRINSIC VALUE u The dollar value (return) that could be realized if an option were exercised or liquidated at a given strike price. u Call option is in-the-money if the strike price is below the futures price. u A put option has intrinsic value if the strike price is above the futures price.

INTRINSIC VALUE u If a corn call option has a strike price of $2.10 and the underlying futures price is $2.18, the call option has an intrinsic value or is in-the-money by 8 cents. u If a soybean put option has a strike price of $5.25 and the underlying futures price is $5.15, the put option has an intrinsic value of 10 cents.

IN-THE-MONEY u If an option has intrinsic value, it is said to be in- the-money. u · Put Option - If the strike price (of a specific contract) is above the current futures price, the put has value and is in-the-money. u · Call Option - If the strike price is below the current future price (of a specific contract) the call has value and is in-the-money.

OUT-OF-THE-MONEY u If an option has no intrinsic value, it is said to be out-of-the-money. An option that is out-of-the- money would not be worthwhile to exercise. u · Put Option - If the strike price (of a specific contract) is below the current futures price the put has no value and is out-of-the-money. u · Call Option - If the strike price is above the current futures price (of a specific contract) the call has no value and is out-of-the-money.

u CBOT Options CBOT Options