Posted by: usset001 | June 21, 2013

July Options Expire (and Peter Paperfarmer finishes marketing his 2012 crop)

peterpaperfarmerPeter Paperfarmer is one of my celebrity producers. His marketing approach sheds light on the value of buying call options to replace harvest sales of grain. July options expired today, and I can close the books on one more year for Peter.

Peter has no on-farm storage – he sells his grain at harvest. For corn and soybeans, he re-owns his crop on November 1 of each year, with the purchase of an at-the-money July all options. Peter maintains his option position until expiration in mid-June. For hard red spring wheat, he re-owns his crop on September 1, with the purchase of an at-the-money May wheat call options, and maintains his option position until expiration in mid-April.  He pays 1 cent per bushel in brokerage fees to purchase the options, and another 1 cent to exercise a profitable option at expiration.

Here is a summary of Peter Paperfarmer’s results for the period 1990-2012 (23 years).

Corn

July calls expired worthless: 15 years

July calls were profitable: 3 years

July calls expired in-the-money, but not profitable: 5 years

Average loss: ($0.02)/bushel

Best year: $2.73/bushel in 2007/2008

Peter’s record in corn is dismal. If not for an incredible profit in 2007/08, he would be showing double-digit losses.

Soybeans

July calls expired worthless: 5 years

July calls were profitable: 11 years

July calls expired in-the-money, but not profitable: 7 years

Average gain: $0.31/bushel

Best year: $4.03/bushel in 2007/2008

Peter’s record in soybeans is contrary to theory and very good. Buying at-the-money options should turn a profit about 20-25% of the time. In soybeans, Peter profited nearly half the time.

HRS Wheat

May calls expired worthless: 14 years

May calls were profitable: 7 years

May calls expired in-the-money, but not profitable: 2 years

Average gain: $0.07/bushel

Best year: $3.03/bushel in 2007/2008

His wheat record is somewhere in the middle of corn and soybeans, with an incredible 2007/08 performance dragging his average intoi positive territory.


Responses

  1. One or two to rerbmeem, that is.


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