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ADVANCED OPTION STRATEGIES

ADVANCED OPTION STRATEGIES. WHAT IS THE DELTA OF AN OPTION ? CHANGE IN PREMIUM/CHANGE IN UNDERLYING FUTURES. TO BE FULLY HEDGED AGAINST PRICE RISK – YOU WILL LIKELY NEED TO PURCHASE OPTIONS IN MULTIPLES LARGER THAN YOUR CASH POSITION.

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ADVANCED OPTION STRATEGIES

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  1. ADVANCED OPTION STRATEGIES

  2. WHAT IS THE DELTA OF AN OPTION ?CHANGE IN PREMIUM/CHANGE IN UNDERLYING FUTURES

  3. TO BE FULLY HEDGED AGAINST PRICE RISK – YOU WILL LIKELY NEED TO PURCHASE OPTIONS IN MULTIPLES LARGER THAN YOUR CASH POSITION.

  4. BUY A CALL TO LOCK IN MAXIMUM PRICEFOR AN INPUTDEC CORN FUTURES = $2.202.20 DEC CALL = $ .16TYPICAL BASIS AT HARVEST = - .15

  5. MAXIMUM PRICE = 2.20 -.15 BASIS +.16 PREMIUM---------$2.21

  6. WHAT IF CORN PRICES FALL TO $1.50/BU ?WHAT IF CORN PRICES RISE TO $3.50/BU?DECEMBER CORN =$3.50IF BASIS IS $ -.15THEN CASH = $3.35THE 2.20 CALL IS WORTH AT LEAST $1.30NET PURCHASE PRICE =$3.35 – 1.30 + .16 = $2.21

  7. DECEMBER CORN = $1.50IF BASIS = -.15THEN CASH = $1.35CALL OPTION IS WORTHLESSNET PRICE =$1.35 + .16 = $1.51

  8. IS THERE A SITUATION WHEN A GRAIN PRODUCER MAY WANT TO PURCHASE A CALL OPTION?

  9. A PRODUCER MAY FIND HIMSELF IN A SITUATION WHERE HE CAN NOT MAINTAIN HIS INVENTORY BUT WISHES TO RETAIN THE PRICING ASPECTS OF OWNERSHIP

  10. FOR EXAMPLE :LETS SAY YOU NEED TO MOVE SOME OLD CROP CORN TO MEET CASH FLOW NEEDS – BUT YOU THINK THAT THE PRICE OF CORN MAY MOVE HIGHER THIS SUMMER AND YOU WANT TO HAVE THE OPPORTUNITY TO PROFIT FROM THAT MOVE.

  11. YOU HAVE A COUPLE OF ALTERNATIVES – ONE IS TO SELL CASH CORN AND BUY A FUTURES CONTRACT – YOU REMAIN IN A SPECULATIVE POSITION.

  12. OR YOU COULD BUY A CALL AND SELL CASH.THIS ALLOWS YOU TO SET A MINIMUM PRICE BUT YOU CAN TAKE ADVANTAGE OF A PRICE RALLY.

  13. Cash Corn today is $2.05/buSo you sell the cash and buy $2.40 call option @ $ .10/buYour minimum price is $2.05 - $ .10= $ 1.95/bu

  14. If prices fall you lose your $ .10 premium. But if the price of July corn goes to $3.00/bu then you get:Cash price of $ 2.05 + $ .60 option premium - $ .10 option cost = $ 2.65/bu

  15. Fencing in a price:July corn = $2.33/buJune Basis = $ -.10/buBuy a July 2.30 put @ $.10/buSell a July 2.50 call @ $ .07/bu

  16. Your minimum price would be:$2.30 Strike price- .10 basis- .10 put premium+. 07 call premium----$2.17/bu

  17. Your price cap would be:$ 2.50 Call strike price -.10 Basis -.10 Put Premium +.07 Call Premium -----$ 2.37/bu Cap

  18. $2.36 $2.30 Futures Price $2.33 $2.50 $2.23 Hedge with Futures $2.17

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