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3. Use options. While options are rather expensive due to the high volatility in the underlying futures markets, Mark explains that put options can be used effectively to create floor selling prices and calls can create ceiling purchase prices.
"Options offer the advantage of not requiring delivery of the physical product, unlike most cash forward contracts," he says. "Additionally, they enable the hedger to benefit from favorable price moves and do not require margining an unfavorable price move in the futures market (beyond the total option premium paid), provided that the hedger has only purchased options (not sold, or wrote, puts or calls)."
Mark says options may also be easier than futures contracts when managing the risk of futures commission merchant (FCM) defaults.
"After the mismanagement of customer hedging funds at two large FCMs this last year, it would seem that maintaining as small of balances in the hedging account as possible would help protect a hedger's money," Mark says. "Because a purchase of an option (put or call) only requires payment of the total option premium (it is a limited risk position), the amount of money put into a trading account held by a FCM can be limited."
Mark says that options may be a more effective way to cover futures positions right now than using a stop loss order. "For example, a hedger with a short futures position might have a standing stop loss order (to his/her broker) to offset/exit the position if the price trades up to a certain level. This practice would limit the losses associated with that short futures position, although it also lifts the hedge," he says.
He explains that in a market environment like this, with large daily price changes and high volatility, it is increasingly likely that these types of stop loss orders could be triggered and the futures hedge is offset, even when the hedger didn't want the hedge lifted (because prices may quickly revert to the lower level, in this example).
"Using a call option, in tandem with this short futures hedge, can cover some of the losses the short futures position generates as price increases and assist with exiting the position," Mark says. "Essentially, this is a synthetic put. The same can be done for a long futures hedge by purchasing a put option to protect the sales (or offset) price of the futures hedge."
"Be certain to pay premiums on time and talk to your crop insurance agent before cutting, chopping, haying, or abandoning an insured crop," Mark said. "For harvested grain, be certain to understand and follow record keeping requirements set forth by your crop insurance company and agent."