Strike options meaning9/16/2023 ![]() The seller (writer) of the call option must sell futures (take the opposite side of the futures transaction) if the buyer exercises the option. The buyer of a call option purchases the right to buy futures. Call OptionsĪn option to buy a futures contract is a call option. For example, a July corn option expires in June.įind more contract specifications for grain and oilseed futures and options from CME Group. Options expire in the month prior to contract delivery. ![]() The expiration date is the last day on which the option can be exercised. However, you run the risk of having the option exercised by the buyer before you offset it.Īn option expires if it is not exercised within the time period allowed. The amount of gain or loss from the transaction depends on the premium you received when you sold the option and the premium you paid when you repurchased the option, less the transaction cost. If you have written (sell) an option, you can offset this position by buying an option with the same strike price and delivery month. However, if the option you sell does not have the same strike price and/or delivery month as the option you originally purchased, you will now have two positions in the market one as a buyer and another as a seller. The amount of gain or loss from the transaction depends on the premium you paid when you purchased the option and the premium you received when you sold the option, less the transaction cost. If you have already purchased an option, you can offset this position by selling another option with the same strike price and delivery month. The option writer (seller) takes the opposite side (buy) of the futures position.īecause of the option seller’s obligation to take a futures position if the option is exercised, they must post margin money and is faced with the possibility of margin calls. When a put option is exercised, the option buyer sells futures at the strike price. The option writer (seller) takes the opposite side (sell) of the futures position at the strike price. When a call option is exercised, the option buyer buys futures at the strike price. Only the option buyer can exercise an option. The option can be exercised, it can be sold, or the option can be allowed to expire.Įxercising an option converts the option into a futures position at the strike price. There are three ways you can close out an option position. ![]() If you exercise a December corn option you will buy or sell December futures. For example, corn options have December, March, May, July, and September delivery months, the same as corn futures. Options have the same delivery months as the underlying futures contracts. When buying an option you must choose which delivery month you want. If futures price increases (decreases), additional strike prices are added When trading is initiated on an option, trading is available at a series of strike prices above and below the current future’s price. For example, if the July corn futures price is $5, there will be corn options introduced with strike prices of $4.80, $4.90, $5.00, $5.10, and $5.20. Strike prices are listed at predetermined price levels for each commodity: every 25 cents for soybeans, and 10 cents for corn. This will occur regardless of the current level of futures price. For example, if you choose a soybean option with a strike price of $12 per bushel, upon exercising the option you will buy or sell futures for $12. When buying or selling an option, you must choose from a set of predetermined price levels at which you will enter the futures market if the option is exercised. Calls and puts are not opposite sides of the same transaction. Call and put options are separate and distinct options. If you buy an option to sell futures, you own a put option. If you buy an option to buy futures, you own a call option. All buying and selling occurs by electronic trading or open outcry of competitive bids and offers in the trading pit. For example, if you buy an option with the right to buy futures, the option seller (writer) must sell futures to you if you exercise the option. Option contracts are traded in a similar manner as their underlying futures contracts. The option seller (writer) must take the opposite side of the option buyer’s futures position. The buyer of an option acquires this right. Methods of using crop price options to market crops are presented in the following information files:Īn option is the right, but not the obligation, to buy or sell a futures contract. The basic concepts of crop price options are discussed below. ![]() Teaching activity Crop Price Options Basics ![]()
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