Back to School With Marketing Guru Ed Usset #38

Most options strategies used by producers involve the purchase of options, but there is a strategy that involves the sale of call options against ownership (unpriced grain in storage, or growing in the field). This is called selling a covered call because, in a rising market, your losses on the call option are covered by the increasing value of your unpriced grain. Let’s assume that you do it – with December futures trading at $3.72 per bushel, you sell a 380 December corn call for 28 cents per bushel to enhance the price of your crop developing in the field. Between now and harvest, which way would you like to see prices trend?

a.    higher

b.    lower

c.    sideways

Answer (c): Selling an at-the-money call is a flat price strategy – your results are best if December corn remains in the $3.70-3.80 price range. Selling calls offers a limited hedge with limited gain – an unconventional risk management strategy.