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bkadds
Advisor

Out of the money puts question.

Can somebody explain these in simplified terms as a market guy is recommending them and how do you determine which month to do them under. Thanks in advance.
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3 Replies
BlackCattle
Frequent Contributor

Re: Out of the money puts question.

I assume you mean buying puts. I personally beleive selling puts or calls  is only way to make money consistently with options. Which I very rarely mess with. Time decay will get your money and I believe strait futures or other forward selling vechiles are way better than buying puts,  if you are trying to protect an  actual crop. Purchasing options really only make money when bought before the move, which has at the least, has mostly played out. So if you have the foresight, like buffet says, when its raining gold grab a bucket, not a thimble

 

Yeah the risk is known up front but options are not a 1 to 1 trade due to the greeks... google it for more info...  

 

 

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c-x-1
Veteran Advisor

Re: Out of the money puts question.

is the rec for buying or writing the puts? thanks

 

imo - anything with options is pretty speculative or $$ you could apply to insurance, instead... in a quiet market the option writers are usually the stronger hands with weak specs "hoping" for a weather pop or whatever. so buying puts for a hedge strategy is like buying insurance against a move - lets face it - that goes down from here which eventually has 0 value at the end of the term.

 

if a producer is actually wanting to hedge (lock in) a price for part or all of their new crop, i think best strategy is straight futures contracts - no value loss over time... figure approximate prod size - what % r u locking in @ 5000 bu/contract - then u sell that # of  Dec futures contracts now or when u or your advisor feels good resistance area has been achieved.

 

for the extremely risk averse producer (someone new, or just needing to make it out alive this yr) ...they decide, ok, i need to sell my corn after harvest at 4.50--not worried about making more, my costs are covered and i make the yr.

 

A. say they're figuring an avg of 150bpa on 1000ac --150,000 bu ----so they can rest easy for the rest of the mktg year --sell 30 Dec futures contracts

 

B.....or next farmer with same production who's in a ittle better shape, but also thinks $4.50's not bad might   sell 15 and gamble on other half.

 

in both scenarios, if something profound like 2012 -- both these fellas can cover their shorts with some loss, so as not to miss out entirely on selling their physical at higher prices. 

  both win if harvest price is $3.00 - b/c they made 150 cents on the futures shorts - which translates into a synthetic physical sale of $4.50 for the bushels hedged.

 

hope this helps - from a non-producerSmiley Wink

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Shaggy98
Senior Advisor

Re: Out of the money puts question.

I've been buying out of the money puts for 3 years now.  Until recently, I was breakeven but felt better because I had price protection if the bottom fell out.  So far this year I'm over $1 ahead of the game, but I've been repositioning myself and riding the price down banking the money instead of leaving it on the board.  I've said it before, I don't mind making my broker a little money as long as he returns the favor.  If price goes up, all I'm out of is the initial price of the put, no margin money is required.

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