A Simple Options Question

[terribletrader]

Hi guys

I'm completely new to Options

Have attached Fridays Option tables from ABN AMRO. Soybean Meal Option Puts - Page 2 in attachment. Would "Settle" tend to be a rough guide to what the premium is going to cost ?? eg $8.30 premium to buy a $320 PUT ? And is that $8.30 per ton ? Obviously then you have your commission on top.

We buy soymeal and i am looking to buy out the money PUTS as insurance against falling prices when we purchase our physical

Any help much appreciated

 

[Alessiop]

Hi guys

I'm completely new to Options

Have attached Fridays Option tables from ABN AMRO. Soybean Meal Option Puts - Page 2 in attachment. Would "Settle" tend to be a rough guide to what the premium is going to cost ?? eg $8.30 premium to buy a $320 PUT ? And is that $8.30 per ton ? Obviously then you have your commission on top.

We buy soymeal and i am looking to buy out the money PUTS as insurance against falling prices when we purchase our physical

Any help much appreciated

Hi,
yes the settlement price can be an indication of the premium you could pay or collect. considering your example, it is $8.30 per ton, the contract size is 100 tons, so total premium would be $830 usd per lot

 

[mb325]

Hi,
considering your example, it is $8.30 per ton, the contract size is 100 tons, so total premium would be $830 usd per lot

The settle is used for a variety of reasons but it is basically the 'official' price for a particular trading session or day. Sometimes it can be the last price traded before the close, or a volume weighted average of the last x minutes of play, or even just the last trade at a particular time such as the German Bund which settles at 16.15 GMT. It can be used to mark positions to market, or for to calculate extra margin etc. So it does indicate a rough price which you may have to pay but it could vary quite a bit from that

I believe what I quoted above is incorrect. The contract size of both the future and the option is 100 tons, so if you buy one of those puts at a price of $8.30 you have the right to sell 100 tons or 1 future at that price. From a common sense point of view it's not going to cost you $830 usd to buy puts on 100 tons notional of a product which costs just $337/100 tons at the moment.

 

[Alessiop]

The settle is used for a variety of reasons but it is basically the 'official' price for a particular trading session or day. Sometimes it can be the last price traded before the close, or a volume weighted average of the last x minutes of play, or even just the last trade at a particular time such as the German Bund which settles at 16.15 GMT. It can be used to mark positions to market, or for to calculate extra margin etc. So it does indicate a rough price which you may have to pay but it could vary quite a bit from that

I believe what I quoted above is incorrect. The contract size of both the future and the option is 100 tons, so if you buy one of those puts at a price of $8.30 you have the right to sell 100 tons or 1 future at that price. From a common sense point of view it's not going to cost you $830 usd to buy puts on 100 tons notional of a product which costs just $337/100 tons at the moment.

Sorry you are wrong. the contract size of 1 future contract on Soybean meal is 100 tons, worth around USD 34,000 (and a required margin per lot of $2,420 for the JUl16 contract).
BTW, could you imagine something worth $337 per 100 tons? $3.37 usd per 1 ton??? i don't think there is anything worth producing if worth only $3.40 per ton( i.e. around 907 kg being 'short' tons)!!

 

[terribletrader]

I thought it best to try and put it in better detail what it is that I will be trying to do in future:


I am exploring introducing option strategies into my work. Basically I sell physical ag commodities and am looking at offering customers the option of "buying insurance" when the buy their physical - This would entail in most cases buying Puts.


By the way - I have a former background in futures but options are fairly new to me – just have a basic understanding.


Easy example of what I want to do:


TODAY I sell 1000 Metric Tonnes of physical soymeal per month (a total of 7000 MT) for collection in or around the last day of each month - June through December 2016 to Company X. We have already shipped the soymeal from South America and put into our store and the customer collects it from there. If the price today is £300 per metric ton ($432.75 at today’s FX 1.4425) so the customer is paying £300,000 ($432,750) per month for their 1000 MT.


Company X want to buy puts to cover their exposure as they feel there is a good chance prices will fall.


I would look at buying puts in every CBOT contract month that covers the period of the contract so e.g. July 16 to Jan 17 to cover 1000 MT in each month.


Just taking one month as an example – against the October futures which currently trades $337


What would be the cost of options to cover approximately 1000 Metric tonnes (1100 Short tonnes approx.) for an out the money put at strike Price $320?


I really want the PUT coverage to be that the customer get paid out an approximate equivalent amount to what they have lost on their physical purchase. So if the market in October falls to $310 I would want enough puts on to compensate for a $10 loss x 1000 MT = £10,000 ($14,425)


What would be the current market cost of the premium of buying a Put at $10/$20/$30/$40/$50 OTM e.g. $320 310 300 290 280 etc. – just looking for an example so any contract month will do preferably Oct, Dec, Jan so I am looking a bit further out? Is there enough volume traded on the further out months?


And do you know the sort of total commission charged on each Option for buying a put and the cost for offsetting/exercising/letting option expire?

Looking at the CBOT options tables would "Settle" tend to be a rough guide to what the premium is going to cost?? e.g. $9.65 premium to buy a $320 PUT in August contract? And is that $8.30 per ton ?


Sorry for so many questions – just trying to build an understanding before pressing ahead!


Thanks !

 

[Alessiop]

I thought it best to try and put it in better detail what it is that I will be trying to do in future:


I am exploring introducing option strategies into my work. Basically I sell physical ag commodities and am looking at offering customers the option of "buying insurance" when the buy their physical - This would entail in most cases buying Puts.


By the way - I have a former background in futures but options are fairly new to me – just have a basic understanding.


Easy example of what I want to do:


TODAY I sell 1000 Metric Tonnes of physical soymeal per month (a total of 7000 MT) for collection in or around the last day of each month - June through December 2016 to Company X. We have already shipped the soymeal from South America and put into our store and the customer collects it from there. If the price today is £300 per metric ton ($432.75 at today’s FX 1.4425) so the customer is paying £300,000 ($432,750) per month for their 1000 MT.


Company X want to buy puts to cover their exposure as they feel there is a good chance prices will fall.


I would look at buying puts in every CBOT contract month that covers the period of the contract so e.g. July 16 to Jan 17 to cover 1000 MT in each month.


Just taking one month as an example – against the October futures which currently trades $337


What would be the cost of options to cover approximately 1000 Metric tonnes (1100 Short tonnes approx.) for an out the money put at strike Price $320?


I really want the PUT coverage to be that the customer get paid out an approximate equivalent amount to what they have lost on their physical purchase. So if the market in October falls to $310 I would want enough puts on to compensate for a $10 loss x 1000 MT = £10,000 ($14,425)


What would be the current market cost of the premium of buying a Put at $10/$20/$30/$40/$50 OTM e.g. $320 310 300 290 280 etc. – just looking for an example so any contract month will do preferably Oct, Dec, Jan so I am looking a bit further out? Is there enough volume traded on the further out months?


And do you know the sort of total commission charged on each Option for buying a put and the cost for offsetting/exercising/letting option expire?

Looking at the CBOT options tables would "Settle" tend to be a rough guide to what the premium is going to cost?? e.g. $9.65 premium to buy a $320 PUT in August contract? And is that $8.30 per ton ?


Sorry for so many questions – just trying to build an understanding before pressing ahead!


Thanks !

Hi, contract size for 1 lot of Soybean Meal options is 100 tons, the 320 put aug16 current quote is 7.85 x 8.15, so you would probably buy it now at 8, which is $800 per lot.
That been said the sensibility of option prices to underlying price movement decreases as the moneyness decreases, so the price of 1 lot OTM put won't increase from 8 to 9 if underlying goes from 344 to 343. Moreover if the price drops from 344 to 321 in august the option will expire worthless and client, on top pf paying premium (total of 8,000 usd) won't recover anything for that said drop. Your requirement ("want the PUT coverage to be that the customer get paid out an approximate equivalent amount to what they have lost on their physical purchase") can be achieved if you buy options with strike near the agreed purchase price with expiries ideally equal (or a bit longer) than their delivery dates. In this way you are sure that anything below the purchase price will be 'recovered' wih the option hedge.

Considering your example it would be 10 lots per month to cover 1000 tons

 

[terribletrader]

Hi Allesiop

Thanks for your reply which is much appreciated. I think almost everything has now been clarified.

Can you just clarify if I bought the 10 Puts @ $320 costing me $8000 how much would I be in profit if we were trading $310 ?

Thanks

 

[Alessiop]

Hi Allesiop

Thanks for your reply which is much appreciated. I think almost everything has now been clarified.

Can you just clarify if I bought the 10 Puts @ $320 costing me $8000 how much would I be in profit if we were trading $310 ?

Thanks

Hi,

At expiry, if the underlying trades at $310 you would make $2 net per ton [$10 intrinsic value of the option ($320 - $310) minus $8 premium paid], therefore $2,000 net for 1,000 tons.