TFM Perspective 6-24-2022


Short-Dated Options for June 30 Stocks and Acreage Reports

Short-dated options were introduced by the CME a decade ago and have continued to gain traction ever since, helping provide a risk management tool for farmers and other market participants. We will focus on two short-dated option strategies in this Perspective: buying puts and buying calls.

What are short-dated options? They are options based on a long-dated futures contract, where the option itself has a shorter time frame. Let’s start with two facts about them: 1) Short-dated options expire the month prior to the calendar name (May expires in April, June expires in May, etc.); 2) Short-dated options for corn are based on the December futures; soybeans are based on November futures.

For example: A July short-dated corn option expires in June; it is based on the December futures and is exercised as a December futures contract. A July short-dated soybean option also expires in June; however, it is based on the November futures and is exercised as a November futures contract.

Because they have less time value, you are spending less dollars compared to a traditional option, when comparing cost at the time of purchase. Meaning, purchasing an option with 30 days of time value will cost you less than purchasing an option with 150 days of time value. A big advantage to short-dated options is that it may allow you to buy more options for the appropriate amount of crop coverage during an important window of time.

On June 30, the market will have new USDA information in the form of an updated acreage estimate and quarterly stocks. There will be much hype beforehand as to what the numbers might be. However, whatever the USDA releases will negate all the pre-report scrambling. In other words, there will be much opinion and guessing, yet the numbers will be what they will be. To outguess the reports could be futile. Using strategy may be the best way to prepare for whatever the report says and how the markets react.

Let’s say that, prior to the June 30 report, you want downside price protection against unpriced expected production. You could consider buying an August short-dated put for corn or soybeans. The total cost is less than buying a traditional December corn or November soybean put.  Or, if you forward contract, you could purchase short-dated call options. If futures rally, your forward sales are set and you have an opportunity to potentially gain with the calls. One detail to keep in mind is that you don’t have long-term protection like you would with traditional options. Another potential downside is that the average cost per day for short-dated options can be more than traditional options.

The bottom line is that short-dated options are another tool available to producers which can help them manage risk and shift opportunities. August short-dated options expire on July 22 and September on August 26. These options can get you through the reports on June 30, and also critical crop weather for approximately 30 or 60 days, depending on your choice of time. Have a conversation with your advisor and use the best tool for your risk tolerance, operation, and goals.

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.


Bryan Doherty

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