Be the first to like this
Trading Agricultural Futures Options
Producing and buying agricultural products can be risky. Prices can rise rapidly if there is a threat to supply and fall equally fast if there is an overabundance. People need to eat so there is a fairly constant demand. A constant concern for production is the weather. The threat of drought in the American Great Plains, the Ukraine, Brazil, or Argentina can drive up soybean, corn, wheat, and cattle prices. Excellent weather across North America is predictive of abundant harvests of wheat from Texas to Alberta and a fall in wheat prices. Trading agricultural futures options is a common way to hedge risk for both producers and buyers of agricultural products. A farm co-operative may buy calls on corn futures whereas a meat processor may buy calls on pork bellies. They both buy options to hedge risk.
Hedging Instead of Speculating
Producers and buyers are buying agricultural commodity futures in hedge business risk. They do not shop around for what they trade. They commonly limit themselves to buying puts and calls in trading agricultural commodity futures. A common approach is to retain the right to buy or sell a futures contract without tying up money and carrying risk through uncertain times. Producers and buyers watch long term weather forecasts to see if a drought in a major producing area such as the Ukraine, Brazil, or the American Midwest will drive commodity prices up. When a trader is fairly certain that prices will rise or fall he can buy or sell futures contracts with a fair expectation of profit. By trading agricultural futures options the trader does not have to commit to buy or sell until he sees the price move. A drought may resolve itself with plentiful rain and an excellent growing season may be ruined by hailstorms. Options trading gives producers and buyers the right to buy or sell agricultural commodity futures at advantageous prices, and avoid being tied up in a losing contract.