Extracting Time Value

What’s Happened…

After the release of the January WASDE report, reality hit home that corn prices may not move higher anytime soon. Domestic and world supplies are considered plentiful. The message to end users was that you don’t have to buy in a hurry to make large purchases. The “just–in–time inventory approach” will likely take hold, which means end users will only buy as needed until something more urgent comes along to create a reason to aggressively buy ahead. Unfortunately for corn farmers, this means they will likely be picking up the storage tab. If prices do trade in a sideways pattern, is there a way to try and generate revenue streams to help pay for storage or challenge 2026 prices to move higher? 

Why this is Important…

With margins pinched, it may be paramount for farmers to explore generating revenue at any angle. While this could create an environment of additional risk, selling call options against unpriced inventory makes sense, since the only way a call option can gain value is for the market to rally. In that case, the unpriced inventory benefits from this price increase. For the 2026 corn crop, if prices currently are not high enough for you to make sales, then selling call options may be considered a challenge for the market to move higher. At expiration, one of two things happen: the sold calls lose all their value, or they are exercised (converted) into sold futures (hedge) at the sold strike price. In either case, the premium is still collected.  

Specifically, how does it work? When you sell a call option, you sell someone the right to own futures at a designated price level (strike price). The seller, otherwise known as a writer, collects the premium. This is done through a brokerage account. Your brokerage account will likely show a debit and a credit. The credit is for the premium collected and the debit is the open trade equity. In other words, you have not earned the money yet, so this shows as a debit. As time progresses, the credit stays the same. If the option loses value, the debit is reduced and eventually drops to zero if the option expires without value. If prices rally and the call gains value, the credit stays the same and the debit grows, which can create a margin call. 

Selling call options have a fixed profit component and unlimited risk in addition to initial and maintenance margins. You need to be prepared for this. However, as mentioned, a sold call option can only gain value if the underlying futures contract is gaining value. The expectation is that your unpriced inventory, whether it be in a storage bin or expected production for next year, will gain value. 

What can you do about it?

Have a conversation with your advisor about how option writing can be implemented for your operation. If you have not sold options, start slowly and learn how to use this strategy. It is said that most options lose value. Mathematically this makes sense as the futures price, on the option expiration date, settles at a price. All call options above the settlement price and all puts below the settlement price will have lost all their value, benefiting the option seller, not the buyer. If sold calls expire without value, this credit to your account adds to the bottom line to your final cash sales price. In all cases, however, be prepared for any market move.   

Find out what works for you… 

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally–charged responses to market moves, which are always dynamic.

About the Author: With the wisdom of over 36 years at Total Farm Marketing and following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of Brokerage Solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the markets and marketing tools, a strong listener, and communicates with intent and clarity to ensure clients are comfortable with their decisions. 

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation. 

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Bryan Doherty