kets have what is called a demand monitor normal volatility
skew or slope, in which the equiva- Are these levels above or below risk cOnsideratiOns
lent upside strikes are more expen- normal volatility levels? If so, by how
sive than the equivalent downside much? Knowing what the current position is
strikes. Identifying whether present and what it protects is imperative to
For example, with prices at $6.00, implied volatility levels are below, the success of a hedging program that
the $1.00 out of the money $7.00 above, or close to normal volatility incorporates option strategies.
call will generally be more expensive levels is another step in the ongoing Because option positions are not
than the equivalent $5.00 put. So if evaluation process. static like future positions, you must
you would sell a $7.00 call and buy a monitor strategies on a regular basis.
$5.00 put with the futures market at track the characteristics Any short position should always be
$6.00, you would collect a premium oF the grain markets For scrutinized and readjusted when the
even though the market, theoretical- seasonal tendencies premium isn’t justified. Simply asking
ly, has the same chance of getting to What are the seasonal tendencies yourself, “Would I initiate a sale of
either price level. This phenomena of the market? Are the tendencies this option at this price today?” would
exists nearly all the time in the grain strong? Volatility levels tend to have be a worthwhile daily exercise. Yet
markets regardless of the number seasonal tendencies with a higher the same goes for the longs, both
of days till expiration, price of the premium wanted in times that crops when they become so far in or out
futures market, or any other inputs. are in the ground and yield prospects of the money that they have changed
Here are five steps to consider be- are suspect and less so, when not. characteristics.
fore implementing option strategies: The seasonal market factors
have not been as strong with the t Wo risk rules
Watch Futures market historically high recent prices, in First, do not sell extra options
Has movement in the futures which implied volatility levels have based on deltas (i.e selling 100 con-
market justified the price, in which shown unusual tendencies, due to tracts of the 50 delta calls to hedge a
buyers and sellers have traded numerous outside factors. 50 contract position). Unneeded net
options? How fast, far, and often the short options can completely destroy
underlying (futures) market moves measure relationship successful option hedging programs.
is imperative to judging how much bet Ween Futures prices and Second, rid yourself of options that
to pay for options. Inevitably, how implied/actual volatility become cheap. If you sold a $7.00
far and fast the underlying (futures) Does historically high or low futures December corn call for 50¢ in July
market move determines the failure market price affect implied and and it is worth only 3¢ in September,
or success of a specific option actual volatility? there is likely little reason to still be
position. The flexibility and versatility short it. Regardless of the fact that it
that options provide in helping to is probably now unlikely to come into
check implied volatility enhance hedging opportunities is the money (trade above the strike),
Is recent implied volatility certainly worth the added time and trying to squeeze the last couple of
trending in one direction? If so, by energy it takes to monitor them. cents out of what was once a useful
how much? Whether options play a small or short position is a major (and unfortu-
Watching whether option premi- large role in your marketing strategy, nately common) mistake.
ums (implied volatility levels) have you no doubt increase the chances of Again, assessing your options posi-
been rising or falling in the shorter maximizing profit potential of your tion on a regular basis and determin-
time frame defines the option mar- crop. ing whether (at the new price and
kets expectations. with different days to expiration) you
would initiate the same position is an
important risk-management tool.
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