Put Options Lesson 1: Add Value to Cash Sales

Last week, (third week in April 2022), we recommended our clients purchase September Soft Red Winter Wheat Put Options and most likely within the next two and half months, we will be recommending the purchase of December corn puts and November soybeans puts. 

We will present a series of educational explanations about put options. Even though most of you do not grow wheat, you need to understand how put options work and what they can do for you. The wheat market is “ripe” for put options to be used; corn and bean markets are not. Now is the time to expand your understanding of marketing tools.

Why buy puts?

To make money; to add additional value to the HTA or cash price sales you have already made or will make.

Options are called “options” because the buyer of the option is buying opportunity, but not the obligation, to establish a futures position at a specific price for a defined length of time.

The buyer of a put option is buying the right, without the obligation, to sell a futures contract.

Because there is no obligation to sell a futures contract is the reason why the buyer of an option will never have to add more money to his option account if the market moves against him. After you pay for your option, no one will ever request or require more of your money to hold that option position; that is to say, no margin calls.

Our clients who bought $9.00 September 2022 Soft Red Winter Wheat (SRWW) puts bought the right to sell September SRWW futures at $9.00 any business day they wish to do so between the day they bought the put option and the close of trading on 25 August 2022, the expiration date.

Some clients bought $10.00 September puts. They could have bought $9.10, $9.20, $9.30, etc all the way up to $17.40 or all the way down to $3.20. These values are called strike prices.

The option’s market value, called its premium, trades in cents per bushel for 5,000 bushel contracts because the futures contracts are 5,000 bushels. The smallest price change (tic) of the premium’s value is one-eighth of a cent.

Below is the screenshot of September 2022 SRWW puts ranging from a strike price of $8.60 to $10.40 as of the close of business last week.

The $9.00 and $10.00 puts are circled.  Note the column labels.

You can see the $9.00 put settled at 26-0; that means 26 and zero-eighths of a cent per bushel. The premium (cost, value) of the $9.00 put at the close was $1,300, which is 26 cents times 5,000 bushels.

Likewise, the $10.00 put settled at 58 and seven-eighths of cent per bushel for a total cost of $2943.75 per option.

September wheat futures settled at $11.01. Why would anyone pay 59 cents per bushel for the right to sell September wheat futures at $10.00 or 26 cents for the right to sell September wheat at $9.00? 

Get comfortable with the vocabulary: premium, strike price, put option (aka: put), margin call, expiration date.

Stay tuned to learn how to use put options to reduce risk, increase income, reduce stress.