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

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 December 2015 corn put option @ $4.10 per bushel DayFutures Price Option Premium Intrinsic Value Time Value 1$4.1425$0.32325$0.00$0.32325 2$4.1125$0.33625$0.00$0.33625 3$4.0425$0.37625$0.0575$0.31875 4$4.0275$0.39325$0.0725$0.32075 5$4.0075$0.40325$0.0925$0.31075

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 a Fence Buy Put Option Dec. 2015 Corn @ $3.50 Premium = $0.13 Sell Call Option Dec. 2015 Corn @ $4.50 Premium = $0.1875

6. Fence for Speculator Buy Put Option Dec. 2015 Corn @ $3.50 Premium = $0.13 Sell Call Option Dec. 2015 Corn @ $4.50 Premium = $0.1875

7. Fence for Hedger Buy Put Option Dec. 2015 Corn @ $3.50 Premium = $0.13 Sell Call Option Dec. 2015 Corn @ $4.50 Premium = $0.1875

8. Option Returns in Spread Buy Put Option Dec. 2015 Corn @ $4.50 Premium = $0.67875 Sell Put Option Dec. 2015 Corn @ $3.50 Premium = $0.13

9. Spread for Speculator Buy Put Option Dec. 2015 Corn @ $4.50 Premium = $0.67875 Sell Put Option Dec. 2015 Corn @ $3.50 Premium = $0.13

10. Spread for Hedger Buy Put Option Dec. 2015 Corn @ $4.50 Premium = $0.67875 Sell Put Option Dec. 2015 Corn @ $3.50 Premium = $0.13

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

12. Condor Buy Put @ $3.50 Premium = $0.13 Sell Put @ $2.50 Premium = $0.00625 Buy Call @ $4.50 Premium = $0.1875 Sell Call @ $5.50 Premium = $0.05875

13. Condor for Hedger

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

15. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/ Spring2015/ Have a great weekend!