Put options promise

June 17, 2008 07:00 PM
Linda H. Smith, Top Producer Executive Editor
Right now, a price decline may be the last thing on grain traders' minds. However, the old adage "sell the rumor, buy the fact,” is based on history—weather markets typically top before the extent of the damage has been quantified. "If you want to ensure that you don't miss out on these prices yet you don't want to commit to delivery or you want to keep your upside open, put options are the way to go,” says Carl German, University of Delaware Extension economist.
"Don't get sticker shock,” adds Brian Grete, senior market analyst with ProFarmer in Cedar Falls, Iowa. "Premiums are more expensive than usual because the levels you are guaranteeing are two or three times higher than just a few years ago. Look at them on a percentage basis—or better yet, consider whether they offer the price protection you are seeking.”
To keep costs in line, Grete suggests buying a September option and rolling it if you continue to want coverage in December or beyond. "This minimizes the time value you are paying for. Sometimes you can sell the nearby contract before expiration, capturing intrinsic value, and buy the next contract at a higher level.”
Click here to find more information on put options, view the PowerPoints presentations and take a self-quiz from a Webinar held June 17.

You can e-mail Linda Smith at lsmith@farmjournal.com.

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