KEY
Ag Decision Maker Activity
Option Tools to Reduce Price Risk
File A2-67
Using File A2-67 answer the questions below.
1) New Crop Soybeans – Put Option Strategy. It is May and I am
considering buying a put option to provide price insurance for the
soybean crop I just planted. November futures are $12.50 and the
November at-the-money put option premium is 30 cents.
a) What will my projected net selling price be next fall if
November futures price is $6.50 and the expected harvest
basis is 25 cents?
November futures (harvest)
Expected harvest basis
Expected cash price
$11.50
-.25
$11.25
Strike price
November futures (harvest)
Option exercise value
$12.50
-11.50
$1.00
Expected cash price
Option exercise value
Option premium
Net selling price
$11.25
+1.00
-.30
$11.95
b) What will my projected net selling price be next fall if
November futures price is $13.50 and the expected harvest
basis is 25 cents?
November futures (harvest)
Expected harvest basis
Expected cash price
$13.50
-.25
$13.25
Strike price
November futures (harvest)
$12.50
13.50
Option exercise value
Expected cash price
Option exercise value
Option premium
Net selling price
$
0
$13.25
+ 0
-.30
$12.95
c) What will my actual net selling price be next fall if November
futures price is $11.50, the put option premium is $1.05, and
the actual basis is 25 cents?
November futures (harvest)
Harvest basis
Cash price
$11.50
-.25
$11.25
Cash price
Option premium (harvest)
Option premium (May)
Net selling price
$11.25
+1.05
-.30
$12.00
d) What will my actual net selling price be next fall if November
futures are trading for $13.50, the put option premium is 5
cents, and the actual basis is 35 cents?
November futures (harvest)
Harvest basis
Cash price
$13.50
-.35
$13.15
Expected cash price
Option premium (harvest)
Option premium (May)
Net selling price
$13.15
+.05
-.30
$12.90
2) Old Crop Corn – Put Option Strategy. It is harvest and due to a
widespread drought July corn futures are trading for $3.40. I
decide that I want to store my crop until next June before I sell it
but would like to buy some price insurance now. A July at-the-
money put option is trading at 25 cents. The expected basis in
June is 25 cents.
a) What is my projected "minimum selling price" if I buy the put
option?
Option strike price
Expected June basis
Option premium (harvest)
Minimum selling price
$3.40
-.25
-.25
$2.90
b) What is my projected net selling price in June if July futures
price drops to $2.20?
July futures (June)
Expected June basis
Expected cash price
$2.20
-.25
$1.95
Strike price
July futures (June)
Option exercise value (June)
$3.40
-2.20
$1.20
Expected cash price
Option exercise value (June)
Option premium (harvest)
Net selling price
$1.95
+1.20
-.25
$2.90
c) What is my projected net selling price in June if July futures
price drops to $3.00?
July futures (June)
Expected June basis
Expected cash price
$3.00
-.25
$2.75
Strike price
July futures (spring)
Option exercise value (June)
$3.40
-3.00
$ .40
Expected cash price
Option exercise value (June)
Option premium (harvest)
Net selling price
$2.75
+.40
-.25
$2.90
d) What is my projected net selling price in June if July futures
price rises to $3.80?
July futures (June)
Expected June basis
Expected cash price
$3.80
-.25
$3.55
Strike price
July futures (June)
Option exercise value (June)
$3.40
3.80
$ 0
Expected cash price
Option exercise value (June)
Option premium (harvest)
Net selling price
$3.55
0
-.25
$3.20
e) What is my actual net selling price in June if July futures
price drops to $2.50, the put premium rises to 95 cents, and
the actual June basis is 20 cents?
July futures (June)
Actual June basis
Actual cash price
$2.50
-.20
$2.30
Actual cash price
Option premium (June)
Option premium (harvest)
Net selling price
$2.30
+.95
-.25
$3.00
f) What is my actual net selling price in June if July futures
price drops to $2.50, the put premium rises to 95 cents, the
basis is 20 cents, and it costs me 25 cents to store the corn
until June?
July futures (June)
Actual June basis
Actual cash price
$2.50
-.20
$2.30
Actual cash price
Option premium (June)
Option premium (harvest)
Net selling price
$2.30
+.95
-.25
$3.00
Net selling price
Storage cost
Net selling price after storage
$3.00
-.25
$2.75
g) What is my actual net selling price in June if July futures
price rises to $3.70, the put premium drops to 5 cents, and
the actual June basis is 30 cents?
July futures (June)
Actual June basis
Actual cash price
$3.70
-.30
$3.40
Actual cash price
Option premium (June)
Option premium (harvest)
Net selling price
$3.40
+.05
-.25
$3.20
h) What is my actual net selling price in June if July futures
price rises to $3.70, the put premium drops to 5 cents, the
actual June basis is 30 cents, and it costs me 25 cents to
store the corn until June?
July futures (June)
Actual June basis
Actual cash price
$3.70
-.30
$3.40
Actual cash price
$3.40
Option premium (June)
Option premium (harvest)
Net selling price
+.05
-.25
$3.20
Net selling price
Storage cost
Net selling price after storage
$3.20
-.25
$2.90
i) What is my actual net selling price if I don’t buy the option at
harvest and store and sell my corn on the cash market in
June? July futures price rises to $3.70, the actual June
basis is 30 cents, and it costs me 25 cents to store the corn
until June
July futures (June)
Actual June basis
Actual cash price
$3.70
-.30
$3.40
Actual cash price
Storage cost
Net selling price after storage
$3.40
-.25
$3.15
j) What is my actual net selling price if I don’t buy the option at
harvest and store and sell my corn on the cash market in
June. July futures price drops to $2.50, the basis is 20
cents, and it costs me 25 cents to store the corn until June?
July futures (June)
Actual June basis
Actual cash price
$2.50
-.20
$2.30
Actual cash price
Storage cost
Net selling price after storage
$2.30
-.25
$2.05
k) What is my actual net selling price if I sell the corn at
harvest? July corn futures are trading for $3.40 and harvest
cash price is $2.90.
Harvest cash price
$2.90
3) New Crop Soybeans – Put Option Strategy – Reduced Yield. It
is May and I have just planted my soybeans. Prices are as
follows:
a) November futures price is $7.00
b) forward contract price for harvest delivery is $6.50
c) November at-the-money put premium is $.40
I am concerned that prices might be lower at harvest. So I am
considering locking in a price for my soybeans now, but I am
concerned what might happen if I have a poor crop. Compare the
results of the following three marketing strategies:
a) price my soybeans with a forward cash contract
b) buy price insurance against lower prices by buying a put
option
c) wait until harvest to sell my soybeans
I am planning on a 40 bu. per acre soybean crop. What is my
projected net price for each of the three strategies above? What is
my projected net price if I produce only 20 bu. per acre?
Assume that at harvest November futures price is $5.50 and cash
price is $5.00. Which strategy turns out best?
Cash sale
Contract
40 bu. yield
20 bu. yield
$5.00 x 40 = $200 $5.00 x 20 = $100
$6.50 x 40 = $260 $6.50 x 40 = $260
$5.00 x 20 = -100
$160
Put
$5.00 x 40 = $200 $5.00 x 20 = $100
.40 x 40 = -16
.40 x 40 = -16
1.50 x 40 = 60
1.50 x 40 = 60
$244
$144
What if futures price is $9.00 and cash is $8.50? Which one is the
highest risk?
Cash sale
40 bu. yield
20 bu. yield
$8.50 x 40 = $340 $8.50 x 20 = $170
Contract
$6.50 x 40 = $260 $6.50 x 40 = $260
$8.50 x 20 = -170
$ 90
Put
$8.50 x 40 = $340 $8.50 x 20 = $170
.40 x 40 = -16
.40 x 40 = -16
$324
$154
4) Old Crop Corn – Call Option Strategy. It is fall and I just
harvested my corn crop. A widespread drought has pushed corn
price upwards. I believe that prices will move even higher into
spring but I don’t have any storage space available. Also, I am
concerned about a major decline in corn prices. July futures price
is $3.40 and cash price is $2.90. An at-the-money July call has a
premium of $.20.
If I sell my corn and buy the call option:
a) What is my projected minimum selling price at harvest?
Harvest cash price
Option premium
Minimum selling price
$2.90
-.20
$2.70
b) What is my projected net price if July futures price is $2.20 in
June?
July futures (June)
Strike price
Option exercise value (June)
$2.20
3.40
0
Harvest cash price
Option premium (harvest)
Option exercise value (June)
Net selling price
$2.90
-.20
0
$2.70
c) What is my projected net price if July futures price is $3.00 in
June?
July futures (June)
Strike price
Option exercise value (June)
$3.00
3.40
0
Harvest cash price
Option premium (harvest)
Option exercise value (June)
Net selling price
$2.90
-.20
0
$2.70
d) What is my projected net price if July futures price is $3.80 in
June?
July futures (June)
Strike price
Option exercise value (June)
$3.80
-3.40
.40
Harvest cash price
Option premium (harvest)
Option exercise value (June)
Net selling price
$2.90
-.20
.40
$3.10
e) What is my actual net price if July futures price is $3.50 in
June, cash price is $3.20, and the July option premium is
$.15?
Harvest cash price
Option premium (harvest)
Option premium (June)
Net selling price
$2.90
-.20
.15
$2.85
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