Should Producers Sell Options?

[Jim Meade / Iowa City]

The editors called out a market analyst's suggestion that some may wish to sell corn puts.  Here's the article if you'd care to read it yourself.

http://www.agriculture.com/markets/analysis/crops/analyst-be-ready-to-sell-puts

As an old fashioned hedger, I've always been leery of selling options.  Selling options is something traders do for a living and they apparently make good money at it.  I don't have the education or time to sit at a screen and do the calculations to figure if I should sell options.  I don't even like to buy options.

Do you as a producer feel comfortable selling options?  There is a limited return and unlmited risk, the game is played by professionals, and most of us have other things to do than sit on the ticker all day.

There is no doubt that among us who post here there is a wide comfort level on markeing.  Some won't sell until the grain is in the bin, some will Texas hedge before a seed is in the ground.  Is selling options just another tool in the producers inventory, or is it trying to play in a game that is not our strong suit?

Obviously, there is no right or wrong on this, but I'll admit I'm not a fan of the ordinary farmer selling options.  What do you think?

[hardnox]

I'm OK with where I am and not interesting in opening up more risk, either by lifting puts or selling new ones.

Also for those with little sold, it is my general opinion that when you've had a bad marketing performance year you're best to move on and not take more risk to try to bail it out.

As far as moving on, that is best done with considering multiple years' experiences, not just doing what worked this year next year.

Although that has generally worked the last few years- selling into seasonal rallies.

But there are examples of purely contra-seasonal years where it never materializes. One supporting factor that tips to the probabilty that it will occur is heavy spec short positioning- which was evident in spades this spring. We just didn't know if or what was going to trigger it.

[timetippingpt]

Simply put (get it, put) ...we sell LOTS of options...often...simple risk management.

Today, if you are a corn user, sell a Sept 320 put for a nickle. Gives you 3.15 corn minus basis for cripe sake. For our hog farm, we would sell the 330 put at take their 11 cents. IF you are really hedging, selling options just gives you a hedge PLUS the volatiltiy premium. Kind of like x+1.

[Jim Meade / Iowa City]

I don't get it.

You sell a 320 put for a nickle  If corn goes to 315 you are even, minus commisions, etc.  If corn goes to 300 you would have been better off to buy feed at 300 rather than 315.

If corn goes to 350, you would be better buying a call.

selling options still seems like speculation to me.

[timetippingpt]

The option expires in 14 days. Then you do it again.

Your example completely left out the likelihood of either outcome. Niether price target is likely in the next 14 days, possible but not likely. Based upon the current market position, 350 seems more likely than 300 to me, but there is no known outcome in advance. And regardless of outcome, if you are hedging, it is beneficial to be a capturing entity of the volatility premium.

How a hog feeder is speculating by selling corn puts is just beyond my comprehension. Sorry I can't get your mental gymnastics. You are speculating on the fact that he might do better, doing something different. That is a fast road to the insane asylum.

You are also mixing futures and cash price risk management. He should buy the CASH CORN at the fall harvest WIDE BASIS. He can then exit this hedge exposure and deduct put premium from his cash price. 

No matter how it turns out, over time, capturing volatility premium works to your favor. 

Our simple rule, IF you are going to invest in volatility premium (buying an option), you must sell an equal amount of volatility premium. Simple rule, easy to do, just requires one to leave their fear of the "What if" at the door.

[Jim Meade / Iowa City]

That is an interesting example and frankly is over my head.  I don't understand it.  Maybe not understanding it is why I'm more comfortable not doing it.  

My pretty basic approach is that any time a person is not neutral in the market he is speculating.  

I get the impression that you are using probabilities as certainties.  I appreciate that.  I use that approach by using the seasonals approach to marketing.  In 2008 when the market acted differently, that approach cost me money and I haven't forgotten it.

I'll continue to read and see if I can better understand a more active approach.  

I'll observe that if it takes the level of sophistication you display to market successfully, old timers like me are a dying breed.  I can see where the big guy who can market with more sophistication will outdo me over time.