Farmers often feel very much at the mercy of the markets. It often times seems very unfair…just speaking from experience on this one. We pay to move our cattle to the farm, we pay to move our cattle from the farm, we pay to move our seed and chemicals to the farm and pay to haul our grain off the farm. We have to be master marketers, agronomists, financial wizards, real estate brokers, veterinarians, training coordinators, breeding specialists….I swear the list never ends!
“The farmer is the only man in our economy who buys everything at retail, sells everything at wholesale, and pays the freight both ways.” – George Washington
I have seemingly mastered the markets when there’s volatility. With profitable cash sales, it allows me to capture the up side with call options on the futures market. Without profitable cash sales, you could use put options in the opposite way, use the puts to secure profits and cash sales to capture the upside on your local market. You have to have a marketing plan to define it. You also need to know your break even point, so you know where your profits start and how much you can risk.
Options
How do put and call options work? Well, more easily explained that executed.
Put Options
A put puts a floor under your grain. If you buy a December corn put for $16 with a strike price of $4.00 and the futures price goes under $4.00, the price of the option goes up and you capture the difference between the $4.00 strike price and how low that price goes before you sell your option.
That December 2022 corn put option order looks like this:
BUY +1 /ZCZ22 1/50 DEC 22 400 PUT @4.00 LMT [TO OPEN]
Call Options
A call works the opposite way. It puts a ceiling above your grain. If you buy a December corn call for $67 with a strike price of $5.00 and the futures price goes above $5.00, the price of the option goes up and you capture the difference between the $5.00 strike price and how high that price goes before you sell your option.
That December 2022 corn put option order looks like this:
BUY +1 /ZCZ22 1/50 DEC 22 500 CALL @5.00 LMT [TO OPEN]
Rolling Options
Rolling options costs you often pennies on the dollar. You can roll $.20 for a cost of $.10, so you’re often doubling your money.
What situations would you roll your put option?
I would roll that $4.00 put if the futures price for that contract period falls $.10 or more below the strike price of $4.00. This shouldn’t cost you money, it should be putting the difference back into your account in the form of a credit.
Exactly opposite for rolling a call option. I would roll the $5.00 call up when the futures price for that contract period rallies $.10 or more above the strike price of $5.00. Again, this should not be costing you money. You should be capturing the profits from the rally and putting those into your account as it goes up. Then if that market starts to fall, you’ve capture income from the rally and it’s time to sell that position once your happy with your increased income from that option.
Your Relationship with your Broker
Your marketing plan can have flexibility with rolling options. If you’re utilizing broker services, it may cost you quite a bit to initiate rolling orders, so make sure you know what your commission rates are for purchasing, selling and rolling orders with your broker.
Some brokers work on a flat rate commission and some work on a percentage based commission, make sure you know what their services and expertise are costing you.
I have used TD Ameritrade for years, but TD AMeritrade’s Think or Swim platform is complicated for entering orders. Lack of experience has bitten me in the ass a couple times just on order entry. I recently got my husband, Royce, a RobinHood Account. It’s platform is so much easier and user friendly and with no complicated orders! Give it a try with no minimums.
