Posted by: usset001 | April 17, 2009

commodity options test (continued)

shh - this is a very long test!

shh - this is a very long test!

This is Day 4 of exam questions. Allow me to answer yesterday’s questions first.

Question #1 from yesterday: The option premium and option strike price are…  “c” negotiated by open outcry and determined by the exchange.

Question #2 from yesterday:  When a put option is exercised, the buyer of a put is…  “d” is short the underlying futures contract.

For today’s exam question, I want to get away from the multiple choice format. Try this; put on your commodity brokers hat and offer some trading recommendations to me, based on the following exchange. I will answer the part (a) of the problem as an example.

In a conversation with a fellow trader, I offer the following opinion about the grain markets. “I am very bullish on wheat prices in Chicago. Plantings are down from a year ago and a harsh winter has dampened yield prospects.”

My friend counters with his opinion. “I think the economy has bottomed out and all commodity prices will trend higher over the next year.”

I reply, “I share your sentiment but among the grains (corn, soybeans and wheat), I remain most bullish on the price of wheat.”

You are my broker. Make trading recommendations based on my market opinion. Be specific when necessary concerning buy vs. sell, put vs. call, which commodity, and delivery months.

Make trading recommendation for…

(a) a futures position   I recommend the purchase of wheat futures

 (b) an interdelivery spread position

 (c) an intercommodity spread position

 (d) the purchase of an option

 (e) the sale of an option


Responses

  1. (a)
    Buy November 09 Wheat

    (b)
    -Buy July 09 Wheat Call
    -Sell Dec 09 Wheat

    (c)
    -Buy July 09 Wheat
    -Sell July 09 Corn

    (d)
    Buy June 09 Wheat Call

    (e)
    Sell June 09 Wheat Put


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