SEON | newag1 - 9/8/2010 21:23
right now today, that 8 dollar call will cost 66.5 cents per bushel to give you the right to 'sell' a contract for 8 dollars per bushel, so you would net only 733.5. the market for july currently is 722 so you would be risking 66 cents to gain 11 cents if it ended up in july at 8 even. BUT, more than likely, sometime betweeen now and July if wheat moves up some, the value of that call will rise just as a 7 dollar july call is worth 101 today as the likelyhood of it being 7 is more than the likely hood of 8 so the 7 call is worth 35 cents more today.
Those are expensive calls......and to make matters worse, I was talking about at the money ($6 strike price, which unless my info is wrong are at ~$1.55/bu). So let's see if I have this right.
$1.55/bu x 5000 = $7,750 (ouch).
Scenario 1: Wheat goes to $8:
my $6 calls are worth [($8 - $6) x 5000] = $10,000 - $7,750 = $2,250
My wheat contract with the elevator is worth 5000 bu x $6 = $30,000 - $16,000 in costs = $14,000
Profit = $16,250.
Scenario 2: Wheat stays at $6 or less:
$6 calls are junk = -$7,750
Wheat is worth $14,000
Profit = $6,250
Scenario 3: Don't buy calls
Wheat is worth $30,000 - $16,000 in costs
Profit = $14,000
Scenario 3 looks like the winner. Oh well, back to the drawing board. |
buying calls as insurance
