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Frequent Contributor

Market question buy a call sell a put say what?

All the marketing talking heads are telling us to buy puts and calls to offset all the market swings. Here I was just trying to grow corn and soybeans with my old pre 2000 junk equipment.


So; you can buy or sell a call if you buy a call you have the right to buy a commodity at a set price on or before a set month. If you sell a call, then you must sell the commodity at that price if the buyer asks regardless of the market price. It only happens when the market price is higher than your call price then it’s your loss sometimes lots of $. If you think the market is going to go up buy a September soybean call for 920 and that cost, you 48.875 cents per bushel or $2443.75 plus a commission. If September beans go over 969 you start making money. Flip side you think the market is going down sell a call. Now you must cover this thing they call margin of 10%+-. So; if you sell a 920 call you get 48.875 cents per bushel, but you must put up 92 cents per bushel or net -44 cents $2200 out of your pocket. This is a fun game can we play yet. Oh; wait they said to spread the contracts. Let’s sell at 1160 that covers the margin. Up to a market price of 1040 and we get 4.5 cents per bushel. $225 less commission E-trade is only 50 cents per contract. If the market does not go over 1160 you keep your $225.


Same thing only backwards for puts you pay to buy a putt. That gives you the right to sell at a set price for a set month. If you think the market is going to crash September beans are 920 today, you can put a floor under them at 860 for 23 cents a bushel. Your cost $1150 plus commission. Do you get the felling everybody, but you are making money at this? Fine let’s sell the put remember that margin stuff and to spread it. This is the number you promise to pay for beans no matter what. Let’s go 720 that covers the margin down to 800 and pays you 1 cent per bushel $50 in your pocket. If beans stay over 720 you keep the $50.


Looks like a lot of risk for a little return. Sell 1000 put contracts at 720 you get $50,000 but if the market drops below 800 your covering margin on 5,000,000 bushels. At 750 you need to kick in $2,500,000. Can your credit card cover that? Yes, you would get your $2,500,000 back if it did not cross 720.


How about selling 1000 calls at 1160? It looks better- pays better $225,000 and the market must go up 120 points from 920 to 1040 before you start putting in $. But on 5,000,000 bushels even a penny adds up quick.

Or, do I have it all wrong?

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Contributor

Re: Market question buy a call sell a put say what?

Youve got it right!  Ive always marveled at how farm marketing sections in magazines and farm show sessions include marketing gurus whose main source of income comes from selling subscriptions or commissions on CME contracrs.  They never offer basic cash contract advice.

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