Put Options Lesson 3: Premium Change & Liquidation

This is the third installment of a series of educational explanations about put options. Even though most of you do not grow wheat, you can enhance your marketing profits by learning how put options work and what they can do for you. Now is the time to expand your understanding of marketing tools before the 2026 growing season for corn and beans.

In January 2022, we had clients with July 2022 HTA wheat contracts a little above $8. Because of Russia’s invasion of Ukraine on 24 February 2022, new crop wheat futures eventually exceeded $12 in May 2022.

In the third week of April 2022, we recommended our clients purchase September Soft Red Winter Wheat Put Options.

September wheat futures settled at $11.23¼ on Monday, 18 April 2022, up 22¼ cents. If you do not instantly know that a higher close in the futures contract means put values declined, you need to read the first two put lessons again.

The September CBOT $10 put premium settled at an even 50 cents. Clients who had bought a September $10 put for 59¢ when we recommended, their put was worth nearly 9 cents less, which would be a loss of $443.75 on one option, which is always 5,000 bushels.

However, if our clients had sold September wheat futures, the loss on Monday would have been 22¼ cents, which would be $1,125.50 for a 5,000 bushel futures contract. Since our clients already had $8 HTA contracts, we had not recommended any one sell September futures. However, to help you understand the relationship between futures and options, we will show you the math.

Which is worse? Losing $443.75 on a put option or losing $1,125.50 with a futures contract? Cash flow wise, the answer is obvious.

Be advised you can liquidate futures and options positions any time the CBOT is trading.

How would you liquidate a sold (short) September wheat futures contract position? Simply buy a September CBOT wheat futures contract to offset the sale.

How would you liquidate the September $10.00 put position? Sell a September $10.00 put.

In both cases, you must go through your merchandiser or use your own futures and options account with a futures brokerage firm. Not all merchandisers will buy and sell put options for farmers, in which case, you will need your own futures and options trading account.

Why would you have to buy a futures contract to liquidate a futures position, but you have to sell an option to liquidate the wheat put position?

The short (sold) futures position is a promise to deliver wheat in September and be paid the selling futures price for it (let’s say $11.01). To liquidate that position, you must buy the same contract. Then, the CBOT says your obligation to buy wheat in September offsets (cancels out) your obligation to sell wheat September and the transaction is closed.

However, buying a put is like buying a tangible object for investment purposes; the expectation is to buy the put at a lower price than you sold it, which is the way all short positions work.

When we recommended our clients buy wheat puts, we assumed for this example the September $10 put was bought for 59 cents. That $10 put option gave the buyer of the put the right to sell September wheat futures at $10.00.

On April 18th, September wheat futures gained 22¼ cents. Since the futures were higher, the probability September wheat being below $10 on the option’s expiration day was diminished. Therefore, the value of having the right to sell September wheat at $10 was also diminished.

Did the $9.00 put lose more or less value than the $10 put? If you can answer that question correctly and know why that answer is correct, then you understand the concept of using puts.

Below is the screenshot of the same options with updated premium values as of the close Monday, April 18th, 2022.