Typically, when we buy put options, there's a fundamental reason markets we feel markets will face pressure. That wasn't the case when corn and soybean hedgers were advised Sept. 17 to buy put options on a portion of 2008-crop production. Supply and demand fundamentals are bullish for both corn and soybeans. But the country's financial system was at risk of collapse. Since that time, there have been many actions by the government and Fed to pump liquidity into the economy and calm investor concerns, but financial risks remain.
Today's featured question:
Should we exit the corn and soybean put options that were purchased Sept. 17 if/when a financial bailout package is passed?
Absolutely not. The put options were purchased as an insurance policy -- insurance against potential negative implications a very weak economy could have on the corn and soybean markets. Just because the government has taken some steps to help the economy doesn't mean it will be magically "cured" overnight. It's going to take time -- likely a lot of time -- to get the U.S. economy righted. Therefore, the same negative risks that existed when we recommended buying the puts are still in play, and will be for a while.
It's way too early to cash in the premiums on this insurance policy. If the insurance doesn't pay off, that means corn and soybean traders have brushed aside economic uncertainty and turned their attention back to bullish long-term fundamentals. It would also mean you've more than likely made back everything you invested in the insurance policy (and then some) via price increases in the corn and soybean markets.
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