Put Education. Practical Application 6/29/22

September 2022 CBOT Wheat Puts Continuing Report

After the Close Friday June 24, 2022:

After tracking the September wheat puts daily from April 14th, 2022, on May 20th, we went a week to update as of the close of business on May 27th and no updates were issued for four weeks until today, June 24th, 2022.

A “tic” is the smallest amount a price can change. For grain and soybeans futures, a tic is a quarter cent. For options, a tic is one-eighth of a cent. Options prices, aka premiums, values, are written on quote machines as a whole number dash a single digit of 0 through 7, which are the eighths of a cent. Example: 22-2 = twenty-two and two eighths of a cent, which will be read as twenty-two and a quarter cent.

September 2022 CBOT wheat futures settled at $9.36½ today (June 24th, 2022), down $2.29¾ from four weeks ago. We are closely tracking the $9.00, $10.00 and $11.00 puts. During the past four weeks, September wheat traded as high as $11.78¼ and as low as $9.27¼.

Here is what happened to option values during those four weeks with 27 May quotes on the left and 24 June quotes on the right:

A hedge in one’s own hedging account or as a HTA with a merchandiser, each 5,000 bushel contract gained $11,487.50 during this four week period.

Sept $9.00 put gained 35-7 cents, $1,793.75 per option

Sept $10.00 put gained 75-3 cents, $3,768.75 per option

Sept $11.00 put gained 118-4 cents, $5,925 per option

We have several example farmers using different combinations of marketing tools to price their 2022 wheat:

Dan contracted wheat at $11.00 on a HTA and bought the $9 and $10 puts for 29 cents each.

Joe contracted wheat at $11.00 on a HTA and bought the $10 and $11 puts for 59 cents each.

If Dan and Joe hedged the wheat in their own hedge account and bought the puts:

When the futures price peaked at $12.85 on May 17th, Dan had $16,270 tied up in his options and futures account for each 5,000 bushel futures contract. Since September traded $1.85 above the $11.00 selling price, Dan had to make margin calls totaling $9,250 ($1.85 times 5,000 bu) per contract to cover the $1.85 loss per bushel in his hedge. He had to have $4,120 in his hedge account for “initial margin” to sell one wheat contract and he spent $2,900 for the two puts. The lost value of the puts was paid upfront, so no additional (margin) money was needed.

When the futures price peaked at $12.85 on May 17th, Joe had $19,270 tied up in his options and futures account for each 5,000 bushel futures contract. Joe spent $3,000 more for the two put options than Dan did. Everything else was the same for Joe as it was for Dan.

As of June 24th with September wheat at $9.36½, Dan and Joe had a net profit in their $11.00 futures hedge of $8,175, which they could remove from the account if they so desired. While the put options have increased in value, they cannot remove option profit from the account until the options are sold.

Dan’s $9.00 put has a current profit of $687.50 and his $10 put has a profit of $3,400. If he sold both put options this date, he would have a net put profit of 81¾ cents to add to his cash price at the elevator or his hedge of $11.00. So, as of this date, his net HTA price would be $11.81¾.

Joe’s s $10.00 put has a current profit of 38 cents per bushel or $1900 per 5,000 bushel option and his $11 put has a profit of $1.24 per bushel or $6,200 per 5,000 bushel option. If he sold both put options this date, he would have a net put profit of $1.62 per bushel to add to his cash price at the elevator, or $12.62, just 23 cents from the contract high even though he sold the futures (or HTA) $1.85 below the contract high!

Don who did not sell the futures, but bought a $9 put for 29 cents and then a $10 put for 29 cents. Don has invested $2,900. September wheat has been (and still is) above $9.00 since March 2nd. Don’s net put profit as of this date is 81¾ cents per bushel to add to whatever he could sell the wheat for, which this date would be $9.36 +or- the basis.

Junior, who did not sell futures, but bought the $10 put for 59 cents and then bought the $11 put for 59 cents. Jr. has $5,900 invested. Note than Don’s option strike prices were a dollar less than Junior’s, but cost $3,000 less. Junior’s two puts have a profit this date is $8,125 or $1,625 per bushel on a 5,000 HTA.

Don and Junior bought price insurance to put a floor on their 2022 wheat. They expected (or hoped) wheat futures would go higher and they want the put options to expire worthless because that means they will be selling their wheat above their floor price.

Dan and Joe bought puts to add value to their HTA contracts in the expectation that wheat will decline substantially this summer. If the options expire worthless, the money the spent for puts will come off their HTA price. If the puts are profitable, that profit will be added to their HTA price.

It is important that you understand that Dan and Joe want to lose money on those puts, but Don and Junior want to sell those put options for a profit.

Two famers want the futures to go higher and two farmers want the futures to go lower because they are using the same marketing tool (put options) for a different purpose.

The September wheat puts expire on August 26th, 2022. Since the seasonal trend is down in July and mostly sideways to lower in August, the bulk of the Northern Hemisphere’s wheat harvest is in July and August and they realize there is plenty of wheat in the world despite the news media saying the world has only a ten week supply, these farmers decided to keep all their puts as they see and expect more down side in this wheat market.

We will continue to track these positions into expiration day.

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