calls and puts

[dfarms11]

Does anyone here use calls and puts? Where can I find out more info on them?
The other day on the radio Dave Reiman said that it was a good opportunity to sell Nov canola at 7.50 and buy a call option for $.29 What does everyone here think about that?

[TOM4CWB]

Dfarms11;

The strategy of buying "out of the money" ($380 strike @ $10.30)calls is a reasonable one...

The reason this is out of the money... is because the futures closed Jan 16 04 @$351.90/t. An at the money call ($350/t) was quoted @ $21.40/t.

You can insure your hedge a margin to pay the upside movement of the futures... if for instance a drought hits and the Canola market goes through the roof.

Canola historically has traded between about $200/t and $450/t in the last 10 years...

We are at $350/t... if you hedge here (with a decent basis) and if $10/t (a $380 call)is used, this will mean your hedge would really be at $340/t (less the cost of the basis).

With a call option;

Any futures move above $380/t will allow you to take a long futures position, without the obligation to pay when the futures are below $380/t.

If for instance the futures went to $420/t on July 1st, and It looked like a good crop had emerged... a short position could be placed on the WCE Nov. 04 futures. At this point $40/t would be a locked in $420/t - $380/t) payment on the $380/t call option.

Now if the futures goes back down to $350/t by August 1 04, a simple lifting of the short position @ $420/t will net your futures account $70/t. If you feel more insurance is prudent on the up side after Aug 01 04, you could lift your short position... take the $70/t into your futures account... and reactivate the upside potential of the call by taking the short position off.

If however the Futures rises(on Aug. 1 04) further to $500/t, the SHORT position placed at $420/t (on July 1 04) will create a margin requirement to cover this move in the futures. If a person was tired of covering the margin calls @ $500/t... a simple request of exercising of the $380 call option will still net $40/t in your futures account.

If on the other hand the call is held strictly to cover the production risk of a hedge created when you sold Canola today for fall 04 delivery... you would leave the call active until you had the Canola in the bin.

At this point, if in Oct 04 the Nov 04 futures were @ $400/t, the call would be exercised, and $20/t would be added to your futures account.

If Oct 04 futures had dropped (by then)to $300/t, then you simply let the ($380)call option expire worthless... and have no obligation to pay anyone anything, other than the option call premium already paid.

Hope this helps!