1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant 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. Option Premiums
Intrinsic value will not be less than zero. Remember, you have the right to exercise an option, not the obligation. So if the option is losing money, you can just let it expire.
Time value will gradually approach zero as the expiration date approaches.
Option premium = Intrinsic value + Time value
Call intrinsic value = Underlying price - Strike price
Put intrinsic value = Strike price - Underlying price

4. Example Start with an December 2018 corn put option @ $3.90 per bushel
Day
Futures Price
Option Premium
Intrinsic Value
Time Value 1
$3.8550 $
$0.0450 $ 2
$3.8725 $
$0.0275 $ 3
$3.9625 $
$0.0000 4
$3.9450 5
$3.9325 $

5. 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

6. Option Returns in a Fence
Buy Put Option Dec $3.50
Premium = $
Sell Call Option Dec $4.50
Premium = $0.0975

7. Fence for Speculator Buy Put Option Dec. 2018 Corn @ $3.50
Premium = $
Sell Call Option Dec $4.50
Premium = $0.0975

8. Fence for Hedger Buy Put Option Dec. 2018 Corn @ $3.50
Premium = $
Sell Call Option Dec $4.50
Premium = $0.0975

9. Option Returns in Spread
Buy Put Option Dec $4.50
Premium = $0.7025
Sell Put Option Dec $3.50
Premium = $

10. Spread for Speculator Sell Put Option Dec. 2018 Corn @ $3.50
Premium = $
Buy Put Option
Dec $4.50
Premium = $0.7025

11. Spread for Hedger Sell Put Option Dec. 2018 Corn @ $3.50
Premium = $
Buy Put Option
Dec $4.50
Premium = $0.7025

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

13. Condor Sell Put @ $3.00 Premium = $0.0050 Sell Call @ $6.00
Buy $4.00
Premium = $0.3075
Buy $5.00
Premium = $

14. Condor for Hedger

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

16. Class web site: Have a great weekend!
Have a great weekend!