POINTS ON OPTIONS
There are some important points that were not brought up in “Don't Drop Dimes,” (August, page 38).
“Having a trader's approach” is exactly the wrong way for a producer to use options. The option is insurance on your production, and you don't trade in and out of insurance. Leave the trading to the floor traders.
Make sure you are using a broker who really understands options and their terminology. Volatility, delta and decay may not yet ring a bell with you, but a broker should know these terms inside and out in order to recommend any option strategy.
To be effective, options must be used as part of an overall marketing plan. Options and cash sales are two pieces of the same puzzle: trying to receive the best price for your product.
You don't want to buy puts (or calls) when everyone else is also buying them. Unfortunately, too many producers finally give in and buy puts near the bottom or calls near the top of a price move, and then swear off ever using them again when they end up losing money.
Using options prudently helps you keep focus. You can concentrate on your business and not worry about a big price drop. If prices do rally, you can roll your puts to a higher strike, or just sell your grain at the higher cash price.
As a 15-year floor trader in options and futures, I can say that outside users of options frequently have an incomplete picture of things. I hope the preceding points help to clear up that view.
Prime Investment Services LLC
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