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Agec 420

Agec 420. HW #7: Chart - due today HW #8: Regression – Fri. May 3 HW #9: Options in TradeSim Monday 29 th – David Frey, Kansas Wheat Commission Exam 3: Friday, May 3 - review session?? Options – cont. Position diagrams. Markets. CBOT: http://www.cbot.com/

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Agec 420

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  1. Agec 420 HW #7: Chart - due today HW #8: Regression – Fri. May 3 HW #9: Options in TradeSim Monday 29th – David Frey, Kansas Wheat Commission Exam 3: Friday, May 3 - review session?? Options – cont. Position diagrams

  2. Markets • CBOT: http://www.cbot.com/ • CME: http://www.cme.com/

  3. Options - review Call option: • right to buy the underlying futures contract • at the specified strike price Put option: • right to sell the futures at the strike price Reading Purcell & Koontz – Ch 7 CBOT Publication – on web page

  4. Options – Notes • Calls and puts are separate contracts – not opposite sides of the same transaction • Options usually expire before the futures delivery month begins

  5. Contract Expiration • Futures • no trades in the last 7 business days of the delivery month • 1st delivery day - 1st business day of delivery month • Options • expire 5 business days before delivery begins

  6. Hedging with Put Options • Short Hedger • Wants protection from a price decline • Take a position in futures/options that will make $ if prices decline • Buy a put option • If price fall – put becomes more valuable - position makes $ • If prices rise – put expires worthless • Price is not locked-in (upside potential remains – but at a cost)

  7. Hedging with Put Options - like buying insurance • Pay a premium to protect against possible loss • Once premium is paid – no further obligation • If price fall – you’re covered • (because the put option becomes more valuable) • If price rises – forget about it!

  8. Sample Option Prices • Dec corn – • www.cbot.com • To illustrate • Put-call parity • Time value

  9. Position Diagram • shows how net realized price (profit) changes as the futures price changes Vertical axis: net realized price (profit) Horizontal axis: futures price

  10. Long Cash Net Price 2.80 2.20 2.50 2.80 Futures Price 2.50 2.20

  11. Short Futures @ 2.50 Net Profit +30 +20 +10 2.20 2.50 2.80 Futures Price 0 -10 -20 -30

  12. Long Cash + Short Futures @ 2.50 Futures 2.80 Cash Net Price 2.70 2.60 2.50 2.20 2.80 Hedge 2.50 2.40 2.30 2.20

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