Hedging Against Falling Wheat Prices using Wheat Futures

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Contents

Hedging Against Rising Wheat Prices using Wheat Futures

Bearish strategies in options trading are employed when the options trader expects the underlying stock price to move downwards. It is necessary to assess how low the stock price can go and the timeframe in which the decline will happen in order to select the optimum trading strategy.

Very Bearish

The most bearish of options trading strategies is the simple put buying strategy utilized by most novice options traders.

Moderately Bearish

In most cases, stock price seldom make steep downward moves. Moderately bearish options traders usually set a target price for the expected decline and utilise bear spreads to reduce risk. While maximum profit is capped for these strategies, they usually cost less to employ.

Mildly Bearish

Mildly bearish trading strategies are options strategies that make money as long as the underlying stock price do not go up on options expiration date. These strategies usually provide a small upside protection as well. A good example of such a strategy is to write of out-of-the-money naked calls.

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Best Binary Options Brokers 2020:
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    Free Trading Education!
    Free Demo Account!
    Big Sign-Up Bonus!

  • Binomo
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Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Wheat Options Explained

Wheat options are option contracts in which the underlying asset is a wheat futures contract.

The holder of a wheat option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying wheat futures at the strike price.

This right will cease to exist when the option expire after market close on expiration date.

Wheat Option Exchanges

Wheat option contracts are available for trading at NYSE Euronext (Euronext).

Euronext Milling Wheat option prices are quoted in dollars and cents per bushel and their underlying futures are traded in lots of 50 tonnes of wheat.

Euronext Feeder Wheat options are traded in contract sizes of 100 tonnes and their prices are quoted in pounds and pence per metric ton.

Exchange & Product Name Underlying Contract Size Exercise Style Option Price Quotes
Euronext Milling Wheat Options 50 ton
(Full Contract Specs)
American Calls | Puts
Euronext Feeder Wheat Options 100 ton
(Full Contract Specs)
American Calls | Puts

Call and Put Options

Options are divided into two classes – calls and puts. Wheat call options are purchased by traders who are bullish about wheat prices. Traders who believe that wheat prices will fall can buy wheat put options instead.

Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Wheat Options vs. Wheat Futures

Additional Leverage

Limit Potential Losses

As wheat options only grant the right but not the obligation to assume the underlying wheat futures position, potential losses are limited to only the premium paid to purchase the option.

Flexibility

Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a wheat option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

Learn More About Wheat Futures & Options Trading

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Hedging Against Falling Rice Prices using Rice Futures

Rice producers can hedge against falling rice price by taking up a position in the rice futures market.

Rice producers can employ what is known as a short hedge to lock in a future selling price for an ongoing production of rice that is only ready for sale sometime in the future.

To implement the short hedge, rice producers sell (short) enough rice futures contracts in the futures market to cover the quantity of rice to be produced.

Rice Futures Short Hedge Example

A rice grower has just entered into a contract to sell 200,000 hundredweights of rice, to be delivered in 3 months’ time. The sale price is agreed by both parties to be based on the market price of rice on the day of delivery. At the time of signing the agreement, spot price for rice is USD 13.71/cwt while the price of rice futures for delivery in 3 months’ time is USD 14.00/cwt.

To lock in the selling price at USD 14.00/cwt, the rice grower can enter a short position in an appropriate number of CBOT Rough Rice futures contracts. With each CBOT Rough Rice futures contract covering 2,000 hundredweights of rice, the rice grower will be required to short 100 futures contracts.

The effect of putting in place the hedge should guarantee that the rice grower will be able to sell the 200,000 hundredweights of rice at USD 14.00/cwt for a total amount of USD 2,800,000. Let’s see how this is achieved by looking at scenarios in which the price of rice makes a significant move either upwards or downwards by delivery date.

Scenario #1: Rice Spot Price Fell by 10% to USD 12.34/cwt on Delivery Date

As per the sales contract, the rice grower will have to sell the rice at only USD 12.34/cwt, resulting in a net sales proceeds of USD 2,467,800.

By delivery date, the rice futures price will have converged with the rice spot price and will be equal to USD 12.34/cwt. As the short futures position was entered at USD 14.00/cwt, it will have gained USD 14.00 – USD 12.34 = USD 1.6610 per hundredweight. With 100 contracts covering a total of 200000 hundredweights, the total gain from the short futures position is USD 332,200

Together, the gain in the rice futures market and the amount realised from the sales contract will total USD 332,200 + USD 2,467,800 = USD 2,800,000. This amount is equivalent to selling 200,000 hundredweights of rice at USD 14.00/cwt.

Scenario #2: Rice Spot Price Rose by 10% to USD 15.08/cwt on Delivery Date

With the increase in rice price to USD 15.08/cwt, the rice producer will be able to sell the 200,000 hundredweights of rice for a higher net sales proceeds of USD 3,016,200.

However, as the short futures position was entered at a lower price of USD 14.00/cwt, it will have lost USD 15.08 – USD 14.00 = USD 1.0810 per hundredweight. With 100 contracts covering a total of 200,000 hundredweights of rice, the total loss from the short futures position is USD 216,200.

In the end, the higher sales proceeds is offset by the loss in the rice futures market, resulting in a net proceeds of USD 3,016,200 – USD 216,200 = USD 2,800,000. Again, this is the same amount that would be received by selling 200,000 hundredweights of rice at USD 14.00/cwt.

Risk/Reward Tradeoff

As can be seen from the above examples, the downside of the short hedge is that the rice seller would have been better off without the hedge if the price of the commodity went up.

An alternative way of hedging against falling rice prices while still be able to benefit from a rise in rice price is to buy rice put options.

Learn More About Rice Futures & Options Trading

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Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Choice!
    Free Trading Education!
    Free Demo Account!
    Big Sign-Up Bonus!

  • Binomo
    Binomo

    Good Choice For Experienced Traders!!!

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