Make call options in wheat futures markets work for you.
We need a brief introduction as to WHY people should be interested in reading the article….. eg:
Here is a quick explainer in the various tools available to you the grower to maximise return on your crop. Talk in general terms about timing, risk, reward, and how Flexigrain can assist in the process.
Which strategies are best for which markets?
In a Rising Market
Step 1
Purchasing the Call Option
If a grower anticipates that the futures market will rally, an alternative to buying a futures contract is to purchase a Call Option. A Call Option gives the holder the right, but not the obligation, to buy a futures contract at a specified value (the strike price) before a fixed date (the expiry date).
This strategy avoids the unlimited downside risk associated with owning a physical futures contract, where losses increase as the market declines. The cost to purchase the Call Option (known as the premium) is fixed. The premium’s value is determined by the option’s term (time until expiry) and how close the strike price is to the current futures contract value.
Step 2
Capturing Value
If the futures market rallies above the strike price, the value of the Call Option increases. This is because the option holder has the right to buy the futures contract below the current market value.
The option can be sold at any time before expiry to lock in this gain. If the value captured from the sale exceeds the initial premium cost, an overall profit is made. Should the option be held until the maturity/expiry date, it automatically converts into a futures contract at the original strike price, which can then be sold or held.
Buy call options
Excercise Right to Buy Futures at $$
(Before expiry)
Result = Profit less Cost
$$ – Strikeprice
Expiry: July
In a Falling Market
Step 1
Purchasing the Call Option
If a grower anticipates that the futures market will rally, an alternative to buying a futures contract is to purchase a Call Option. A Call Option gives the holder the right, but not the obligation, to buy a futures contract at a specified value (the strike price) before a fixed date (the expiry date).
This strategy avoids the unlimited downside risk associated with owning a physical futures contract, where losses increase as the market declines. The cost to purchase the Call Option (known as the premium) is fixed. The premium’s value is determined by the option’s term (time until expiry) and how close the strike price is to the current futures contract value.
Step 2
Option Maturing Worthless
If the futures market falls over time, the Call Option loses its value because the strike price is now higher than the current market value of the futures contract. Since the option owner has the right but no obligation to purchase the contract, they will not exercise it, and the option will mature worthless at expiry.
In this scenario, the only cost incurred by the option owner is the initial premium paid to buy the option.
