Grain markets have been weak over the past 15 months. The price action has been sideways to lower, with very little volatility. Why would Top Third recommend buying either put options or call options at these levels?
First, because volatility is so low, buying options could prove to be a significant part of your marketing success. As we head into the summer growing season, there is usually an increase in the volatility of option prices. Both put options and call options could increase in value from the volatility component of an option alone. The value of any option is primarily a combination of time value, intrinsic value, interest rates, proximity to the strike price, and of course - volatility.
Should there be any type of weather scare, options values should increase, albeit the calls will gain faster, and the puts will erode slower.
Second, with the volatility so low, the value of the option is relatively cheap. So, would I rather have you buy an option at cheap levels before summer, or wait and pay more later? I would prefer you buy them now. For those of you who are new to options, this lower volatility gives you a chance to learn about options at a much lower price point.
Of course, there is still downside risk if the summer market doesn’t come to fruition, so owning cheap put option to protect against lower prices is still an important piece of Top Third’s marketing plan.
If you have any questions, please feel free to call the office and talk with one of our risk management specialists at 877-TT-HEDGE.
The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment.