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| Maybe I'm just lucky, but options rarely pay much unless there is big news. For example, I buy a $4 july put to lock in a floor and it costs 50 cents. I'm really protecting $3.50 less trading fee. By the time the put is near expiration usually, its lost it's time value and likely is near zero value since the price is probably $4.10. Somehow the trade knew that 50 cents was a good bet and that 'they' would get most of it. Had hsus lobbied to get all meat production banned making corn worth much less the put would have gained in value and worked out. That is assuming the market got blindsided, but that's rare. However, probably due to normal, technical trading behavior options rarely pay. The trade makes similar trading models, then uses those models and viola it comes true. Even cyclical fundimentals play into market behavior that allows those on the other side of these options to more or less 'know' what's going to happen.
This is obviously an oversimplification and if you are looking to pick up pennies it's likely you could do it consistantly with a very disciplined approach. However, with actual price swings being $1 or more in corn it's hard to get excited about a few cents and trying to extract more than that out of options usually means the house wins. What it boils down to is expensive insurance (ever figure per acre costs on a 20 cent option - $40 on 200bpa corn). I think the guys that really watch the spreads closely can find opportunities, but thinking you are going to outsmart the market consistantly may not be wise. Like a friend told me once when I was considering a turbo diesel for a spraycoupe "do you really think you are going to out engineer a room full of 40 engineers?" - maybe once, but not everytime.
When you think of the OP point of bins vs options, you have too consider what we get paid to do - work. If it was easy, everyone would do it. Putting up bins, filling them, maintaining the grain and later shipping the grain is all work and often has a return. If nothing else you save the minimum elevator storage charge (0.13 to 0.22) - pays for cheap bins in one year. Also, basis gain and price gains (if you want to speculate) are considerable. I like the idea of storing what I don't have presold and delivering when there is free DP - no storage cost and I stop having to worry about maintaining grain quality. Another thing to consider that was brought up in earlier posts is the number of successful farmers that seem to think storage is important. The fbfm does comparisons of operations and at my size I tend to compare to older farmers that tend to have storage. I rarely beat their cash price and over the years it's interesting to see modest size farmers buying land or paying cash for new equipment - probably because they made more money over the years and surely saved lots of it.
Thanks,
Pat | |
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Can you use options instead of building more tanks?
