Using paper

[malleefarmer]

also have a stop loss 80 cents above the sales when I make them in case it spirals upwards

[mbdog]

Farmaholic....your take on options use/function is correct from a sellers perspective. Using them costs money...I understand their function as a hedge, but I rarely use them. Not saying they're bad...they are what they are...but the option costs/trade off the futures. When you take a futures position rather than an option position, you are exposed to the full price move in futures...winning or losing from the position you took. Choosing the option route, you are buying protection upfront against losing, and/or the market going against what you thought. Probably a crappy coles notes explanation I gave. The different option strike prices/volume/interest seem to correlate to different price points/technical objectives derived from futures charts. I think one has to study futures charts to sift out whats value in different option values....or when trying to get a grasp how the "cost" is derived. I'm certainly no expert in this department, but options do work as an intended hedge instrument, and market does the job of pricing them given the different circumstances/risks.
Having said this, I participate little in options trade. Rather use futures, with stops. Hate paying the option premiums.

[mbdog]

Is AV anything BUT a commodity marketing forum?

[charliep]

Perhaps the biggest advantage of using paper (futures and options) is the ability to separate a pricing decision and a delivery commitment. You can use futures to lock in a price without committing your product to a specific buyer. Farmers have more alternatives if the market situation changes or there is a production problem.

It may be worthwhile to commit delivery but not price. That is where basis contract can come in.

It can also fit with a storage strategy. I was chastized for an ARD article on storage and the fact that the market will quite often pay you to store grain. You can use futures markets to capture carry at times.

I note that everyone highlights the expense side of puts but I still like to think of as insurance. Having a put expire worthless is not necessarily a bad thing. It means you have higher prices than the put.

We are talking about crops that have an underlying futures markets. I note the challenges of managing price around pulses has been noted in another thread. Using paper (futures/options) is not the end result - they are tools that can be used when appropriate to the farms overall financial and marketing strategy.

[charliep]

Perhaps another comment is that a farmer is likely using futures/options whether they do it directly or using grain company contracts. Unless grain companies can make sales to processors/exporter at the same time they are buying crop from you, they will be using futures to manage their risk. So it becomes a matter of who maintains the futures account.