Back To School Quiz #6.0

1. I like to tell producers about the “11^th Commandment” of grain marketing, “Thou shall not hold unpriced corn or soybeans in storage after July 1.” What is the driving force behind this commandment?

The tendency of basis to weaken from early summer to harvest

The tendency for new crop futures to decline from early summer to harvest

Both (a) and (b)

While there are exceptions, the tendency for cash grain prices to decline from early summer to harvest is very strong. This due to the fact that two powerful forces are working against the value of cash grain: (1) the tendency for cash prices to fall relative to futures prices and, (2) the tendency for new crop futures to trend lower.

Explanation

While there are exceptions, the tendency for cash grain prices to decline from early summer to harvest is very strong. This due to the fact that two powerful forces are working against the value of cash grain: (1) the tendency for cash prices to fall relative to futures prices and, (2) the tendency for new crop futures to trend lower.

2. Over the past two decades, how often have November soybean futures had a lower price on October 1 than on the previous May 1?

10 years

12 years

14 years

16 years

From 1990 through 2009, November soybean futures traded lower at harvest vs. spring in 14 years, or 70% of the time. The average decline was roughly 30 cents per bushel. In my opinion, this is the second strongest seasonal trend you can find in commodities, second only to the tendency for December corn futures to decline from spring to harvest.

Explanation

From 1990 through 2009, November soybean futures traded lower at harvest vs. spring in 14 years, or 70% of the time. The average decline was roughly 30 cents per bushel. In my opinion, this is the second strongest seasonal trend you can find in commodities, second only to the tendency for December corn futures to decline from spring to harvest.

3. When a put option is exercised, the seller of the put...

Is long the underlying futures contract

Is short the underlying futures contract

Pays the premium

Is long a call

When exercised, the buyer of a put option is short the underlying futures contract, because the buyer has bought the right to sell futures. The seller of the put or, in this case, the oldest seller of this particular put option, is obligated to take the other side of the market. The seller of the put ends up with a long futures position.

Explanation

When exercised, the buyer of a put option is short the underlying futures contract, because the buyer has bought the right to sell futures. The seller of the put or, in this case, the oldest seller of this particular put option, is obligated to take the other side of the market. The seller of the put ends up with a long futures position.

4. Let’s assume that December corn futures are trading at $3.70 per bushel. You pay a premium of 25 cents per bushel for a 360 December put. What is the time value of this option?

10 cents per bushel

25 cents per bushel

$3.60 per bushel

The time value cannot be calculated

An option premium is made up of two components; intrinsic value (if any) and time value. In this case, when the futures price ($3.70) is trading higher than the strike price of the put (360), there is no intrinsic value – the option is trading 10 cents “out-of-the-money.” If there is no intrinsic value, then the entire premium of 25 cents per bushel can be viewed as time value.

Explanation

An option premium is made up of two components; intrinsic value (if any) and time value. In this case, when the futures price ($3.70) is trading higher than the strike price of the put (360), there is no intrinsic value – the option is trading 10 cents “out-of-the-money.” If there is no intrinsic value, then the entire premium of 25 cents per bushel can be viewed as time value.

5. Most options strategies used by producers involve the purchase of options, but there is a strategy that involves the sale of call options against ownership (unpriced grain in storage, or growing in the field). This is called selling a covered call because, in a rising market, your losses on the call option are covered by the increasing value of your unpriced grain. Let’s assume that you do it – with December futures trading at $3.72 per bushel, you sell a 380 December corn call for 28 cents per bushel to enhance the price of your crop developing in the field. Between now and harvest, which way would you like to see prices trend?

Higher

Lower

Sideways

Selling an at-the-money call is a flat price strategy – your results are best if December corn remains in the $3.70-3.80 price range. Selling calls offers a limited hedge with limited gain – an unconventional risk management strategy.

Explanation

Selling an at-the-money call is a flat price strategy – your results are best if December corn remains in the $3.70-3.80 price range. Selling calls offers a limited hedge with limited gain – an unconventional risk management strategy.

6. If you pay a premium of 59 cents per bushel for a 940 November soybean put, what is the most money you can lose?

$9.40 per bushel

59 cents per bushel

Your potential loss is unlimited

Selling an at-the-money call is a flat price strategy – your results are best if December corn remains in the $3.70-3.80 price range. Selling calls offers a limited hedge with limited gain – an unconventional risk management strategy.

Explanation

Selling an at-the-money call is a flat price strategy – your results are best if December corn remains in the $3.70-3.80 price range. Selling calls offers a limited hedge with limited gain – an unconventional risk management strategy.