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Guard Against Surprise Events

February 26, 2014
By: Ed Clark, Top Producer Business and Issues Editor
buy sell marketing

Short-dated options provide protection

Are option premiums too expensive for you? Consider short-dated ones. They are cheaper, and the ability to re-sell them once the event you want to protect against has passed makes them even cheaper.

Introduced two years ago, short-dated options are relatively new, so not many producers use them. However, they offer distinct advantages versus standard options.

For example, in late January, an at-the-money December standard corn put of $4.50 carried a 37¢ premium. By contrast, a July short-dated option carried a 24¢ premium and for May a 16¢ premium, says Brian Basting, an Advance Trading commodity research analyst.

On the flip side: A short-dated July soybean option was 11¢ less than a December standard option. But Top Third Ag Marketing’s Mark Gold prefers a full-dated option because it offers longer-term protection.

"Short-dated options are a valuable tool, particularly this year," Gold says. "The downside risk for soybeans is $8." Even corn, which took major hits early, has additional downside risk, Gold says, "with farmers long 5.5 billion to 6 billion bushels."

However, short-dated options aren’t for everyone. If you use them, you must budget more marketing time into your schedule. They only offer protection for a limited time.

"You can’t lock something in and be done with it," says Frayne Olson, a North Dakota State University ag economist. "You have to pay more attention to the markets."

Analysts say short-dated options offer farmers low-cost protection against single events that can turn the market against you, such as USDA’s March 31 Prospective Plantings report.

"Short-dated options can get you through the March 31 report with no surprises," Basting says.

Bob Utterback"On paper, you can make a case for short- dated options, but in the real world, few producers do."
-- Bob Utterback, Utterback Marketing Services

Return on Time

To showcase the power of short-dated options’ ability to protect against a specific event, look at last year’s numbers. Two days before USDA released its March Prospective Plantings report, December corn futures closed at $5.71 per bushel. However, the report was surprisingly bearish. By April 2, futures closed at $5.36, a 35¢ correction.

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