TOP FARMER WEEKLY PERSPECTIVE 01/27/2023 BY BRYAN DOHERTY

Using Short-Dated Options

Short-dated options are available on December corn and November soybean futures to hedge risk in (what we will term) the near-term for a long-dated futures contract. As an example, if you purchase a March short-dated corn put, you are purchasing a put that gives you the right (not the obligation) to sell December futures. However, the date of expiration is on February 24. Compare this to a long-dated option (otherwise known as traditional option), which has an expiration date of November 24. Short-dated options can also be purchased in soybeans, which are based off the November futures.

The big benefit to short-dated options is that you can buy protection for December corn or November soybeans for a shorter time window. Therefore, you are spending less money versus buying the long-term traditional option. The negative is that the average cost per day for a short-dated option versus a traditional long-dated option is typically higher. The other potential problem is that you have purchased a shorter time window and if, at expiration, you want protection, you will need to make another purchase in either a new short-dated option or a traditional option.

The biggest reason to use the short-dated option is in front of critical time windows. If South American weather becomes a factor, you may only need 60 days of put or call protection, depending on your strategy.  Short-dated options are also advantageous in front of major reports. To exit short-dated options, you typically do so by selling it back to the marketplace (Chicago Board of Trade). However, as an example, say you buy a short-dated corn put that, at option expiration, is deep in the money. You may choose to convert this into a short futures position, which will now be the December corn contract. If the trend is down and you want to stay short futures, you now have through the last trading day for December futures. Another way to view this is that you bought short-term protection that could be converted to a long-term futures hedge.

Before purchasing or selling short-dated options, make sure you have conversations with those who understand how they work, costs involved, and can guide you through the decision-making process. Ask lots of questions and get the answers you need before entering any position. Like any tool in your toolbox, they can be dangerous if not used properly. Knowledge is power. Having knowledge of when and how to use short-dated options provides you leverage in your decision-making process.  

If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

Author

Bryan Doherty