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12 Options Strategies that Work

April 4, 2012
 
 

 

The following information is a Web Extra from the pages of Top Producer. It corresponds with the article "Options for Hire." You can find the article in Top Producer’s Spring 2012 issue.
 
Use the following option strategies to help you market through 2012.
 
  • Long Call. The owner of a call option buys the right but not the obligation to own the underlying futures contract.
 
  • Short Call. A farmer who sells an option does so in an attempt to collect a premium. A farmer may want to sell a call against un-priced crop. The only way a call option can be of greater value after the call is sold is if the underlying futures contract rallies.
 
  • Long Put. The owner of a put buys the right but not the obligation to sell the underlying futures contract.
 
  • Short Put. The seller (writer) of a put option does so in an attempt to collect premium.
 
  • Bull Call Spread. A bull call spread is the purchase of a lower strike price call and shorting of a higher strike price call with the same month and underlying futures.
 
  • Bear Put Spread. This is the purchase of a put option and shorting of a lower strike price put with the same month and underlying futures. The purpose of a bear put spread is to reduce out-of-pocket expense.
 
  • Fence. The term fence is used because this strategy "fences" in a range of prices. A farmer would use a fence to establish a price floor of un-priced inventory.
 
  • Calendar Fence. This strategy is used by a crop farmer to establish a price floor for an extended period of time while selling a call option with a shorter period of time. The goal is to experience time-value erosion with the short call and ultimately lessen the cost of the long put.
 
  • Long Ratio Call Spread. The strategy is used to establish a long position with a delta that could be greater than 100%. A delta of 100% (also referred to as one) represents a futures position or an option that is very deep in the money and moves penny for penny with a change in the underlying futures market. Delta is a measurement of how an option changes value relative to a change in the underlying futures contract expressed in a percentage. An at-the-money option will generally have a delta of 50%, while a deep in-the-money option will have a delta closer to one. An out-of-the-money option has a delta smaller than 50%.
 
  • Long Put Ratio Spread. This strategy is used to establish a short position with a delta that could be greater than 100%.
 
  • Long Strangle. This is used to eventually establish either a long or short position. It is often used when it appears prices could move substantially in either direction.
 
  • Short Strangle. The strategy is used to collect premium with the acceptance that a short futures could be assigned if the underlying futures at expiration is above the sold call price, or a long futures could be assigned if the underlying futures at expiration is below the sold put strike.
 
Source: Bryan Doherty, Stewart-Peterson

 


 

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FEATURED IN: Top Producer - Spring 2012

 
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