When a farmer contracts grain, that includes locking-in the futures price at to arrive at a cash price. Often times, the futures price can move significantly higher after the futures price is locked-in with a HTA or forward contract or in a hedge account.
For decades, our market plan has included put options as a “back-up” tool to capture futures market price gains which might develop after the futures price and to enhance the HTA or forward contract price.
Put options provide you with the ability to increase your contract price if the futures prices decline.
A put option gives the buyer the right to sell futures at a stated price.
The financial risk of buying a put is limited to the cost of the put option.
The potential financial gain is futures price going all the way to zero.
The reason a put is called an option is because the buyer of the put has the option to refuse selling futures at the stated price.
This morning (8 March 2022) July CBOT wheat futures price is $11.90.
The right, but not the obligation to sell July wheat futures at $11.90 is priced at $1.36 per bushel.
The right, but not the obligation to sell July wheat futures at $10.90 is priced at 86 cents.
The right, but not the obligation to sell July wheat futures at $9.90 is priced at 48 cents.
The right, but not the obligation to sell July wheat futures at $8.90 is priced at 26 cents.
The right, but not the obligation to sell July wheat futures at $7.90 is price at 10 cents.
The July wheat options expire on Friday June 24th when the futures stop trading that day.
The owner of an option can sell the option any time the futures exchange is open. But, let’s say a person holds the July wheat puts until expiration day.
Suppose July wheat settles on June 24th at $8.40.
What would a reasonable person conclude the right to sell July wheat futures at $11.90 is worth when July wheat is at $8.40?
If the answer does not smack you in the face, you are thinking way too much. Yes, it is just that simple.
Likewise, what is a July $10.90 put worth on expiration day?
What is July a $9.90 put worth on expiration day?
What is July $8.90 put worth on expiration day?
What is July $7.90 put worth on expiration day?
More about options later. Get the concept of put options clear as a bell in your head.
To learn all about options on futures, go to:
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