Posted by: usset001 | April 14, 2011

Futures and options exam question

Today I give a mid-term examination in my “Futures and Options Markets” class. Below is a question from the exam. Can you answer the question? Good luck.

Trading recommendations (18 points): I am very bullish on the corn market. Ethanol production now consumes nearly 40% of corn production and it is still growing. As a result, corn prices are not driven by feed demand as much as they are by the energy markets, particularly the price of crude oil. The current bull market in crude oil will continue to put upward pressure on ethanol and corn prices. In addition, a La-Nina weather pattern persists, pointing to lower than expected yields in the corn-belt. I am bullish on corn prices.

Higher crude oil prices will also have a favorable impact on wheat and soybean prices. But the price of these commodities will not rise as fast, or as far, as the price of corn.

You are my broker. I want you to make recommendations consistent with my market opinion. Be specific when necessary concerning buy vs. sell, put vs. call, which commodity, and delivery months. Make trading recommendation for…

  1. a futures position
  2. the purchase of an option
  3. the sale of an option
  4. an intramarket (aka interdelivery) spread position
  5. an intercommodity spread position
  6. another intercommodity spread position

Responses

  1. I like the sale of a put option the best because all the comments known above are probably built into the market; that is why I stay away from the long futures position or the simple purchase of a call. Instead I simply sell an out of the money put; which is a bullish play or simliar to going long………..

    the benefit via selling the put out of the money and preferable deep out of the money is I don’t have to guess the market direction; I just simply am betting that the market won’t go down hard;


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