hmm....thank you... so it looks like buying a 6.00 put is 77.87..... i'm assuming that is for one contract, not 5000 (not feasible if for 5000 bu) 3 contracts x 77.87 = 233.61 premium to protect against a fall lower than 6?
If u are conservative, u would contact your nearest hedge brokerages. Most farmers think they can master in hedging their crops. In the end, they suffered massive losses both the crops and hedge. Guess who will be laughing? the farmer neighbors. They will end up buying your land. Good luck rookie.
Note that's the Dec 2012 contract. The underlying future was trading at 5.85 at the point of this snapshot.... so you wouldn't normally buy a put higher than the underlying. (You can, but it might just confuse you at this point.) Here's the Dec 2011 option chain: http://quotes.ino.com/options/?s=CBOT_C.Z11 So you could have bought the 6.00p for 0.215 cents/bushel. You get upside minus .215 cents for premium, with your worst number capped at 6-0.215 = 5.785.
Common, it's not rocket science. The unknown part which require knowledge and experience is the farming and crop evaluation ( his work ). He would end up paying large fees to have a guy in suit submit the same order.
The premium for a 6.00 put is $0.7787 per bushel. To hedge 15,000 bushels (three contracts), you pay $0.7787 x 15,000 = $11,681 plus transaction costs. This is expensive, because the options are "in the money" and have real value. You could immediately turn around and sell the options back and would only be out the spread (although the value declines over time.) There is also a lot of time value in the options, which compensates the option seller for the uncertainty. To put it another way, if you buy a 6.00 strike option now, your worst price for your December 12 crop is $5.22 per bushel (6.00-0.78). However, you have unlimited upside. If DEC 12 corn goes to $10, your realized price would be $10-$0.78 = $9.22 per bushel. As you see, futures lock you into a price but cut off your upside, while options put a (lower) floor under your price, but give you some upside. Emg doesn't have the best "bedside manner," but there is some truth to his posts. A good hedge broker can sit down with you and customize a plan according to your specific needs and keep you from doing something stupid. The farmers that went bust often confused "hedging" with "speculation" and thought that they could outsmart the market rather than use it as a tool to manage risk. Don't go down that path.
thank you for the example....options are not my forte honestly.....I will do some looking (at historical prices as well) and come here for some feedback
ok, to revisit the topic.... I believe that i will look to buy puts when a 650 strike is "cheap" enough. However, can i do this with a mini contract (1,000 bu increments is alot more flexible). If i can do this with a mini contract, is the market just as liquid? Secondly, any broker recommendations for doing this through? Note: I already have MBTrading accounts....
kickout, my firm handles producer and consumer hedges if you'd like to discuss some of your options more in depth. The mini contracts suffer from much less liquidity, wider bid/ask spreads, etc. And I do not believe these have exchange listed options. If outright puts are too expensive, you can sell a call against your floor (known as a collar or fence), you can buy synthetic puts (short fut / long call), purchase put spreads, sell an atm call + buy otm strangle, etc. etc. Your options, no pun intended, are many.
I can vouch for ogarbitrage's firm. I haven't yet personally traded with them, but they have a great deal of expertise across various product categories... Extensive OTC and floor coverage.