Download presentation
Presentation is loading. Please wait.
Published byDaniela Dixon Modified over 8 years ago
1
Econ 337, Spring 2013 ECON 337: Agricultural Marketing Chad Hart Associate Professor chart@iastate.edu 515-294-9911 Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356
2
Econ 337, Spring 2013 Options What are options? An option is the right, but not the obligation, to buy or sell an item at a predetermined price within a specific time period. Options on futures are the right to buy or sell a specific futures contract. Option buyers pay a price (premium) for the rights contained in the option.
3
Econ 337, Spring 2013 Setting a Floor Price Short hedger Buy put option Floor Price = Strike Price + Basis – Premium – Commission At maturity If futures < strike, then Net Price = Floor Price If futures > strike, then Net Price = Cash – Premium – Commission
4
Econ 337, Spring 2013 Put Option Graph Put Option June 2013 Live Cattle @ $128 Premium = $3.275 Commission = $0.01 Strike Price = $128 Put Option Return = Max(0, Strike Price – Futures Price) – Premium – Commission
5
Econ 337, Spring 2013 Setting a Ceiling Price Long hedger Buy call option Ceiling Price = Strike Price + Basis + Premium + Commission At maturity If futures < strike, then Net Price = Cash + Premium + Commission If futures > strike, then Net Price = Ceiling Price
6
Econ 337, Spring 2013 Call Option Graph Call Option Dec. 2013 Corn @ $6 Premium = $0.50 Commission = $0.01 Strike Price = $6 Call Option Return = Max(0, Futures Price – Strike Price) – Premium – Commission
7
Econ 337, Spring 2013 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.
8
Econ 337, Spring 2013 Example DayFutures Price Option Premium Intrinsic Value Time Value 1$12.00$0.60$0.00$0.60 2$12.20$0.56$0.00$0.56 3$11.70$0.83$0.30$0.53 4$11.55$0.95$0.45$0.50 5$11.90$0.67$0.10$0.57 Start with an soy put option @ $12.00 per bushel
9
Econ 337, Spring 2013 Combination Strategies Option fence Buy put and sell call Put spread Buy At-the-money put and sell Out-of-the- money put
10
Econ 337, Spring 2013 Option Returns in Fence Buy Put Option May 2013 Corn @ $6.50 Premium = $0.06125 Sell Call Option May 2013 Corn @ $7.50 Premium = $0.11875
11
Econ 337, Spring 2013 Fence for Speculator Buy Put Option May 2013 Corn @ $6.50 Premium = $0.06125 Sell Call Option May 2013 Corn @ $7.50 Premium = $0.11875
12
Econ 337, Spring 2013 Fence for Hedger Buy Put Option May 2013 Corn @ $6.50 Premium = $0.06125 Sell Call Option May 2013 Corn @ $7.50 Premium = $0.11875
13
Econ 337, Spring 2013 Option Returns in Spread Buy Put Option May 2013 Corn @ $7.50 Premium = $0.53 Sell Put Option May 2013 Corn @ $6.50 Premium = $0.06125
14
Econ 337, Spring 2013 Spread for Speculator Buy Put Option May 2013 Corn @ $7.50 Premium = $0.53 Sell Put Option May 2013 Corn @ $6.50 Premium = $0.06125
15
Econ 337, Spring 2013 Spread for Hedger Buy Put Option May 2013 Corn @ $7.50 Premium = $0.53 Sell Put Option May 2013 Corn @ $6.50 Premium = $0.06125
16
Econ 337, Spring 2013 Combination Strategies Butterfly Condor Straddle Strangle These positions can be flipped
17
Econ 337, Spring 2013 Condor Buy Put @ $6.50 Premium = $0.06125 Sell Put @ $5.50 Premium = $0.0025 Buy Call @ $7.50 Premium = $0.11875 Sell Call @ $8.50 Premium = $0.0125
18
Econ 337, Spring 2013 Condor for Hedger
19
Econ 337, Spring 2013 The 4 Basic Graphs for Options Buy a put Buy a call Sell a put Sell a call
20
Econ 337, Spring 2013 Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/ Spring2013/ Lab in Heady 68.
Similar presentations
© 2024 SlidePlayer.com Inc.
All rights reserved.