Posted by JD Seller on February 15, 2015 at 15:43:07 from (208.126.198.123):
In Reply to: Ag talk ??? posted by Icuby on February 15, 2015 at 14:16:36:
lfure has it right. In futures trading of options you have put and calls.
Puts gain value when the marketed goes down in value during the contract term.
Calls gain value when the market goes UP in value over the contract term.
So right now with the grain market price falling for most common crops you would buy a Put to offset the decreased value of the actual commodity.
The advantage of puts and calls over actually trading the futures of things, buying short or long, is that you loss is limited to the cost of the put or call when you place it.
An example of a put in the corn market is: (This is a made up trade. Just meant to show how the transaction works)
Strike price of $3 per bushel Term of the option: July 2015 to Jan. 2016 Cost of the put: $.50 per bushel
SO if the market price of corn on the CBT goes under $3 then the option/put starts to be worth money. So to break even the market would have to go under $2.50 on a day between July 2015 and Jan.2016. So lets assume the market drops to $2.25 on Nov. 15th, 2015. You would exercise your option on that day and get paid $.75 per each bushel of your contract bushels. So after your option cost you would have made $.25 profit. So you in effect put a $2.50 "floor" under your contracted bushels. This option works best for future sold grain.
IF you think the market MAY raise after you cash sell some grain then you would buy a call. Then if the market takes off, like it did a few years ago, you can profit from it even after you have sold your actual crop.
The trick is to buy options that are affordable but will still protect you if the market drops dramatically. Trying to protect it right to the current price is very costly.
If your going to try using some options in your marketing plan then puts and calls are a safer way to start. Your losses are limited.
If you actually sell/or buy long or short futures than you could be on the hook for margin calls if the market turns wrong. An example of this would be having a short sale with a $7 price on soybeans. Then the market goes to $15 you would have to pay the $8 in margin calls. This is how many people lose big in the market.
I personally know one family that lost $2.5 million on cattle futures about ten years ago. They had to sell all their equipment and rent the farms out to cover the losses.
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