ECON 337: Agricultural Marketing Chad Hart Associate Professor Lee Schulz Assistant Professor

Option Premiums  Can be divided into two sections:  Intrinsic value  What is the option worth today?  Time value  How much time is left on the option? Intrinsic value depends on the futures price and the strike price of the option. Time value depends on the length of time in the option and the price volatility in the market.

Example Start with an December 2015 corn put $4.10 per bushel DayFutures Price Option Premium Intrinsic Value Time Value 1$4.1425$ $0.00$ $4.1125$ $0.00$ $4.0425$ $0.0575$ $4.0275$ $0.0725$ $4.0075$ $0.0925$

Combination Strategies  Option fence  Buy put and sell call  Put spread  Buy In-the-money or At-the-money put and sell Out-of-the-money put

Option Returns in a Fence Buy Put Option Dec $3.50 Premium = $0.13 Sell Call Option Dec $4.50 Premium = $0.1875

Fence for Speculator Buy Put Option Dec $3.50 Premium = $0.13 Sell Call Option Dec $4.50 Premium = $0.1875

Fence for Hedger Buy Put Option Dec $3.50 Premium = $0.13 Sell Call Option Dec $4.50 Premium = $0.1875

Option Returns in Spread Buy Put Option Dec $4.50 Premium = $ Sell Put Option Dec $3.50 Premium = $0.13

Spread for Speculator Buy Put Option Dec $4.50 Premium = $ Sell Put Option Dec $3.50 Premium = $0.13

Spread for Hedger Buy Put Option Dec $4.50 Premium = $ Sell Put Option Dec $3.50 Premium = $0.13

Combination Strategies  Butterfly  Condor  Straddle  Strangle  These positions can be flipped

Condor Buy $3.50 Premium = $0.13 Sell $2.50 Premium = $ Buy $4.50 Premium = $ Sell $5.50 Premium = $

Condor for Hedger

The 4 Basic Graphs for Options  Buy a put  Buy a call  Sell a put  Sell a call

Class web site: Spring2015/ Have a great weekend!