1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
Chad Hart
Associate Professor 1

2. 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.

3. 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

4. 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

5. Option Returns in Fence
Buy Put Option July 2014 $4.00
Premium = $0.05
Sell Call Option July 2014 $5.00
Premium = $

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

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

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

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

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

11. Combination Strategies
Butterfly
Straddle
Condor
Strangle
These positions can be flipped

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

13. Condor for Hedger

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

15. Class web site: See you in lab, Heady 68.
See you in lab, Heady 68.