It's a popular saying — “Options are like insurance. You just hope you don't have to collect.”

Well, like other insurance, the cost of put options has gone up, so much that many growers shy away from them.

“I don't want to, but my guess is that we might have to use some put options this year, even though they're expensive,” says Steve Henry, Arapahoe, NE, corn and soybean producer. He's looking at buying puts and selling calls to reduce his cost of price protection.

Steven Johnson, Iowa State University Extension farm management specialist, says that if producers understand futures options, they can consider the strategy of selling an out-of-the money call option to offset the high cost of a put option.

“This is especially true if you plan to purchase at-the-money put options,” he says.

An at-the-money corn put option, a position that provides the owner with floor-price protection equal to the level of the futures price the time the option was purchased, can easily cost 50¢/bu. or more. That's $2,500 for one 5,000-bu. contract.

When December 2008 corn futures were trading at about $6.40/bu. earlier this summer, an at-the-money put option, meaning the option buyer would have a $6.40 strike price, would have cost 68¢/bu. So subtracting the options premium charge, the floor price was actually closer to $5.70.

What about soybeans? Try at least a buck a bushel for the premium on an at-the-money put option.

In early June, the November 2008 soybean futures were at about $13.60/bu. However, buying the at-the-money put cost about $1.43/bu., putting the actual floor at about $12.10. Cost of one 5,000-bu. put option contract — about $7,100.

“When you get above a $13/bu. strike price for a put option, the premium is about $1,” says Johnson. “I'm not sure how many producers would pay that kind of premium.”

Jason Moss, market analyst with The Brock Report in Milwaukee, WI, agrees that option premiums are too high. “The point to remember, though, is that the premium is directly related to the average daily price fluctuations, a volatility measure, as well as futures margins,” he says. “The best advice for growers in executing options strategies is to think longer term to properly balance risk protection versus cost. They can choose between different strategies, one that suits them best. A higher minimum price equals a higher cost.”