Dairy Futures and Options Tutorial
Examples of the Use of Options
Put Option
- If you are a dairy farm operator, with a Put Option you are establishing a
floor under your milk price.
- You don't care if your milk price goes higher, but your do care if it goes lower.
- Below is a simple example. Assume in July you can buy a November Class
III Put Option with a strike price of $12.00 for a premium of $0.20
(Note:. In this example we assume zero commission costs. The impact of
commission costs will be examined in a later section of this workbook.
We are also not accounting for your basis. We assume your basis does not change).
| Put Option |
| Strike Price |
$12.00 |
| - Premium |
-$0.20 |
| Insure that the Class III will not go below |
$10.00 |
Call Option
- If you are a purchaser of dairy products (e.g. milk, cheese, nfdm,
whey, etc.) with a Call option, you can establish a ceiling on your input costs.
- You don't care if your dairy input costs go lower, but you are concerned with higher costs.
- Below is a simple example. Assume you are an incharge of milk procurement
for a coop. Assume in July you can purchase a Nov. Class III CALL option
with a strike price of $12.00 for a premium of $0.15 (Note:. In this
example we assume zero commission costs. The impact of commission costs
will be examined in a later section of this workbook. We are also not
accounting for your basis. We assume your basis does not change).
| Call Option |
| Strike Price |
$12.00 |
| + Premium |
-$0.15 |
| Insure that the base price will not go above |
$12.15 |