Risk Management 101, Buy when you can, not when you need to

0

Organic corn prices are on the rise. Midwest organic corn prices are testing resistance levels, despite strong inventories. The potential drop in organic maize imports from Turkey could lead to higher prices. The war in the Black Sea will make it difficult for importers to buy corn and ship it to the United States. If you think organic corn prices are about to rise, you might consider hedging your exposure with financial derivatives.

How to hedge organic corn prices

A useful hedging idea to discuss is to buy assets when you can, not when you need to. As organic corn prices test resistance levels, it is possible that a breakout could lead to a new organic corn price range. When the markets are volatile, you can consider hedging yourself using a call spread.

What is a call spread?

A financial derivative called a “call spread” is a combination of call options that allows you to protect yourself against higher prices. A call spread is a risk management techniques where you buy a lower strike call option and simultaneously sell a higher strike call option.

For example, when organic corn prices are about to explode, you might consider buying a $11-$14 buy spread. For a specific premium, you can protect yourself as organic corn is over $11 a bushel and up to $14 a bushel.

The advantage of using a call spread is that the premium cost of buying a call spread is less than the premium required to buy a call option at the lower strike level. By selling a higher strike call that caps your gains, you reduce the premium you have to pay for the lower strike call.

How are options traded

You can buy or sell options through an exchange or market maker. If the product you want to hedge is not on a futures exchange, such as organic bulb, you can request a price from a market maker and place a buy trade. These products are considered over-the-counter derivatives. These OTC derivatives are generally settled against price of organic corn reported by reputable pricing agencies.

The essential

The result is that you should hedge your risk on organic corn prices before they explode. One of the best ways to hedge against rising organic corn prices is to trade a financial derivative. If you can’t trade the product you want on an exchange, you can work with a market maker to trade an OTC call spread to protect yourself from higher organic corn prices.

Share.

About Author

Comments are closed.