Short-dated new crop options another attractive tool for risk management

Tuesday, April 15, 2014

     Short-dated grain options were first listed in May 2012 and are quickly gaining popularity as a risk management tool for elevators and producers alike.  Daily open interest in corn and soybean short-dated options has more than tripled since the beginning of 2013.  Short-dated options seem to be gaining favor over serial and weekly options, products that are also newly listed within the past few years.  There has been a lot of talk about short-dated options lately, so let’s take a look at some of the specifics.

     The underlying futures contracts for corn, soybeans, and wheat are listed for the underlying futures months of December, November, and July, respectively.  Short-dated wheat options cover both the Chicago and Kansas City contracts.  Contract months for corn and soybeans are March, May, July, and September.  Wheat expirations are December, March, and May.  Last trading dates fall on the last Friday of the month before the listed option month, as long as two trading days follow the last Friday. Otherwise, expiration is the third Friday.  See the chart below for information on short-dated listings, courtesy CME Group.



     Because the short-dated option expires before expiration of the standard new crop option, premiums on the contract are lower than premiums for the standard option.  The premiums assigned to all options by buyers and writers are valued with respect to the implied volatility associated with the underlying futures contract.  Changes in the premium are caused by changes in observed market volatility, along with changes in futures prices and time left until expiration.  While the price attached to changes in price and volatility is expected to remain reasonably consistent between short-dated and standard option contracts, there can be substantial differences in the portion of premium derived from time value.  Take for example the July short-dated 520 corn call option.  As of this writing, the premium on the contract traded about 20 cents less than the standard December 520 call.  Much of the 20 cent difference in premium is reflected by the fact that the short-dated contract expires nearly five months prior to the standard December option.

     Short-dated options are an attractive tool because the contracts allow the producer to hedge risk within specific timeframes throughout the planting and growing seasons.  They are also a useful hedge for open futures positions, especially around USDA report days when markets can be volatile.  

     Contact AgriVisor for quotes or for more information on short-dated new crop options.