Seminar Explains
(Continued from Page Al) f or $2,000 per acre. An option
your neighbor is executed an op- contract gives you a right to
tion contract,” he said. “What benefit if prices go in your favor
your neighbor has done is given and gives you protection if they go
you an option to buy the land at a against you. For hedgers it’s like
particular price over a price an insurance policy. You really
particular period of time and you don’t want to need to use in
had to pay your neighbor a fee up surance. You don’t say I wish I
front for that privilege. If you would wreck my car so I get some
decide not to buy the land, your me ou t 0 f the premium I paid for
$lOO is gone. If you decide to buy (be policy to the insurance com
the land your neighbor’s net selling pany. No, you’re glad to give up the
price is $2,100 ($2,000 per acre plus cost of the premium for the
sloooptlonfee).” protection, always hoping you
To further illustrate how an don’t need it. You always want an
option works, Barclay said, “let’s insurance policy to expire wor
say that some time before the end thless. That’s really the way
of the six months you decide to sell hedgers should look at the option
your rights to buy that land (you markets,” Barclay said,
sell your option) for $l5O, in that To help understand the option
case you pass the option to your market better, Barclay listed some
friend and then he has the right to terminology that must be un
buy the land from your neighbor derstood. “The names for options
PUBLIC AUCTION
BUSINESS ESTATE LIQUIDATION
“KRICK TOWING”
Of Lancaster, Pa.
Automobiles, Antique Trucks, Late
Model Heavy & Light Duty Wreckers
FRIDAY, JULY 18,1986
9:30 A.M.
Vehicles at ll:OOA.M.
Located at 1136 Marshall Avenue,
Lancaster, Pa.
VEHICLES
1976 Peterbilt Tandem axel, GVWR
55,280,5R#77545N wrecker with cat engine and
750 Holmes Boom, 1976 Peterbilt Tandem axel
also with cat engine and 750 Holmes Boom, 1980
Chev. Scottsdale 30 wrecker
SR JCKM33A1167536 4 wheel drive with Holms
Commander model 1200 boom 26,000 miles, 1980
Chev. Scottsdale 30 wrecker, SRJCKM33AII6
4750 with Holms Commander model 1200 boom,
4 wheel drive and snow plow, 41,000 miles, both
have twin cable hydraulic booms, 1970 In
ternational Loadstar model COlBOO
5RJ4268006048536 moving van, 1967 Mack Stub
Nose Tractor Chassis #H67T 5RJ2795 (rough)
1977 Chrysler Cordoba 8 auto., 1978 Chev. pick
up 8 auto., 1974 Dodge Swinger 6 auto.,
1973 Chev. Mai. 8 auto., 1976 Chrysler Cordoba 8
auto., 1972 Monte CarloS auto..
ANTIQUES
7-chain driven Mack Bull Dog tractors
(restoration projects) 1928? Reo Speed wagon
wrecker good condition, Fruehauf short flatbed
trailer, Fruehauf equipment trailer on hard
rubber, old model tow motor.
OFFICE EQUIPMENT
To be sold following the vehicles. Sanyo 800
copy machine, Silver Reed 800 elec, typewriter,
4 drawer filing cabinets, Cimatron 208 S adding
machine, desk, swival and straight chairs.
SHOP EQUIPMENT
Motorola Compa Station radio office-mobile
system, gas buggy automatic siphoning
machine, Kellog American model 331 TU
SR. #463921 industrial size air compressor,
Coats 30-40 A tire changer and other tire
changers, Atlas model 1080 drill press, gas
operated chop saw, high pressure washer,
Lincoln welder, farm heater model 105 P,
Marquette battery charger and other chargers,
acetylene torches, disc harrow storage trailer,
gas tanks with pumps, chain saws, buffers,
elec, and air sanders, elec, drills, air wrenches,
parts bins, tarps, creepers, cables, air hose,
grease pumps, hand trucks, tire and tow chains
galore, hooks and pulleys, binders, Bear Cat
210 scanner, loads of Craftsman and Snap On
hand tools, Snap On tool chest, belts and straps,
C clamps, floor jacks, 2-Hahn Eclipse 200
riding mowers, 2-Hahn Eclipse self propelled
power mowers, new and used tires, scaffolding
and junk pile and many items not mentioned.
Auction For
FARMERS FIRST BANK EXECUTORS
CARL E.KRICK ESTATE
Jhtodah)
10 S. Broad St
Lititz, PA 17543
Elmer Murry 626-5244 - 626-2636
Richard Murry 626-8175 • 949-2280
Ken Miller 665-2073
Professional Auctioneers,
Appraisers and Advisors
Since 1953
AU-00648-L
are puts and calls,” he said. “A put
is the option to sell, a call is the
option to buy. You can remember
the difference because put is to put
away from you or to sell, call is to
bring to yourself or buy. If I have a
put option I have the right to sell, if
I have a call option I have the right
to buy. Don’t confuse puts and
calls, they are not the opposite side
of the same transaction. In the
land illustration I bought a call
option, the right to buy and my
neighbor sold me a call option.
When you watch the option
markets in the pits of the com
modity exchanges, there are really
two option markets going on at the
same time. The put market and the
call market and there’s buyers and
sellers in both markets. That
makes understanding options a bit
more complicated to understand
than the futures market,” Barclay
said.
“In an option contract the buyer
can do one of three things: he can
offset the option or sell it to
someone else; he can exercise the
option, actually use the option; or
he can let it expire. The strike
price is the price at which the
transaction will occur. In the land
example the strike price was
$2,000.”
Once hedgers understand the use
of options the next question is
usually: what strike price should I
buy? For option hedgers, the
choice of strike price is a trade off
between the level of price
protection offered versus the
opportunity to benefit from a
favorable price movement.
At-the-money options offer the
most balanced trade off between
protection against downward price
moves and the chance to gain from
a favorable price move after op
tion purchase. A hedger could
choose greater protection against
adverse price moves by pur
chasing an in-the-money option or
a lower amount of price protection
by purchasing an out-of-the-money
option.
Out-of-the-money options are the
cheapest because they offer the
' |
I COMPLETE DISPERSAL i
I THOMAS AND KELLY MIUN !
I Cazenovia, New York jj
I Discontinuing farming Mr. & Mrs. Milin J
| will sell there cattle and machinery at X
I their farm located just off Rt. 13 on the I
| East Road midway between Cazenovia |
I and New Woodstock on the former i
f Washbon Farm. Watch for arrows. V
| THURSDAY EVENING, JULY 10,1986 |
V 7:00P.M. I
| 79-HEAD REGISTERED AND I
( HI-GRADE HOLSTEINS-79 I
r Herd consists of 55 Mature Cows, 4 Bagging |
I Heifers, 4 Shortbreds, 15 Calves and 1 Purebred I
I BuU - 1
t Sires Represented- Jewel Maker, Valiant, X
I Mars. Bootnick, etc. I
x Service Sires- Elmer Chief, Valiant, Lone f
i Ranger, etc. jj
I You’ll find several top cows in this herd. Most I
5 are classified. DHIA records available with *
A‘ records up to 25,000 lbs. milk. i
I Cataloges will be available at ring side. I
! MACHINERY !
IH 1086 Diesel Tractor; Farmall 806 Diesel I
Tractor; IH 2001 loader; IH 710 5B plow drag;' f
Ontario grain drill; cultipacker; Gehl 600 Z
chopper with 2 row com head, picker head and I
- hopper w/screen for Hi-Moisture com; JD s
i blower; IH 990 haybine; NH #282 baler; kicker ■
f rack wagons with JD running gears; elevator; I
X backblade; feed cart; NH manure spreader; x
I bedding chopper; 3 DeLaval milkers (60 lb. I
V pails); dumping station and misc. farm tools. (
jj Also selling: 1980 4 wheel drive Chevy C-10 X
I truck; 16’x40’ silo of com (will furnish auger); I
s 16’x50’ silo on new Alfalfa seeding. x
i Terms-Cash or good check. |
f Owners, I
I THOMAS AND KELLY MILIN |
| Wm. A. Stradling & Son, Aucts. I
r Sale conducted by x
I Lazy S. Livestock Market, I
s Norwich, N.Y. x
I 607-334-8014 or 315-837-4457 |
f Lunch served
least protection against an un
favorable price move. In-the
money options, on the other hand,
are the most expensive because
they offer greater protection. Out
of-the-money options provide the
greatest leverage in the case of a
favorable price move after option
purchase; in-the-money options
provide the least amount of
leverage. At-the-money options
offer an intermediate level of price
protection, leverage as well as
costs.
In determining the actual cost of
the insurance offered by an option,
you should look at the time value of
the option premium. The time
value is the amount the option
seller charges to write the option,
and it should be allocated over the
option’s life. Deep-in-the-money
and deep-out-of-the-money options
will have the lowest monthly cost
because of their minimal time
value. Of course, the amount of
price protection provided and the
total cost of deep-in and deep-out
options are quite different.
Deciding whether to buy an at
the-money, in-the-money or out-of
the-money option for price
protection depends upon how much
protection you need; your
assessment of how prices are
likely to move; and your risk:
reward preferences.
Here are some of the factors you
may want to consider when
choosing a strike price:
1. What is your breakeven point?
When selecting an option strike
price, keep in mind your cost of
production, the option premium
and expected basis.
As an example, suppose you
expect the wheat harvest basis to
be 15 cents under the July contract.
If July wheat is trading at $2.70 and
the July $2.70 put is 7 cents, you
will set a floor selling price of $2.48.
(Strike price ($2.70) - basis (.15) -
premium (.07).) If your cost of
production is above this level, this
strike may not be your best choice.
What is your financial situation?
Suppose your financial condition
is sound and you can afford to
purchase insurance with a large
deductible, in the hopes of
benefiting from a favorable price
move. Then, a put with a lower
strike price may provide adequate
protection.
On the other hand, if you’re
highly leveraged you (and your
lender) may want the additional
protection provided by a higher put
strike price. A lender may be
willing to advance the additional
funds needed to purchase a higher
strike in return for the assurance
of a lower risk exposure.
3. What direction do you expect
prices to move and how sure are
you of this?
Choosing a put strike price on
this basis requires considerable
self-discipline.
Pat Option Time
Strike Premium Value
$2 60 04 .04
$2 80 12 12
$3 00 .24 04
If July wheat is at or below $2 60 at option expiration the floor selling prices will be the
actual net selling prices, assuming the expected basis of 12 under is accurate
Assume July wheat declines to $2 72 at option expiration and the basis is 12 under for a
cash price of $2.60
Cash
Strike Price
$2.60 $2.60
$2.80 $2.60
$260
$3 00
Assume July wheat is unchanged at $2 00 at option expiration and the basis is 12 under for
a cash price of $2 60
Cash
Strike Price
$2 60 $260
$2 00 $2.60
$3.00 $2.60
JULY
SAT. JULY 12 ■ 10AM,
Public Benefit Auction at
the Manheim Farm Show
Building, Manheim, PA.
Quilts, Household Goods,
Baked Goods, Assorted
Items. Auction by Singing
Servants Chorus. John H.
Fry, Auct.
Lancaster Farming, Saturday, July 5,195&A39
The question is not: wnai
direction do you wish prices to go?
But: give the best supply-and
demand information available for
the current crop year, what
direction are prices likely to go?
If the chances of an upward price
move greatly outweigh the
chances of a downward price move
(but you do not want to be
vulnerable to the latter) the put
with the lower strike price may be
your best choice. However, if
demand is weak, the dollar is
strong, and yields look good, a
higher strike price may serve your
marketing needs best.
In comparing options,
remember, if futures go above the
higher (lower) strike less (plus)
the difference in the premiums, the
higher strike put (lower strike
call) will provide a higher selling
(lower buying) price.
4. How much additional
premium are you willing to spend
for each additional cent of price
protection?
Each successively higher
(lower) put (call) strike raises
(lowers) the floor selling (ceiling
buying) price. However, as you
choose successively higher strike
puts (lower strike calls), the ratio
of additional premium cost to the
increased (decreased) floor selling
(ceiling buying) price becomes
progressively unfavorable. For
example, if you are unwilling to
buy additional price protection at
more than a 1:1 ratio, you will find
at-the-money options your best
choice.
Let’s review some specific
examples:
Assume it is April and July
wheat futures are at $2.80. The
$2.60 July put is 4 cents, the $2.80
July put is 12 cents, and the $3.00
July put is 24 cents. Expected
harvest basis is -12 N.
TABLE 1
Monthly Time Floor Selling
Value Cost Price
02 $244
06 $2 56
02 $2 64
TABLE 2
Premium Option
Paid + Value
.04 .00
.12 .06
TABLEI
Premium Option
Paid + Value
.04 .00
12 .00
.24 .20
SAT. JULY 12 -1.30 PM,
Silos, Farm Equip.
Located in Juniata Co. at
the farm of Robert
Swartz, 2 mi. south of
East Salem |ust off Rt.
235 and 6 mi. north of Rt.
322 at Thompsontown.
Follow direction signs
Robert & Delbert Swartz,
owners. Bryan D. Imes,
Auct.
William Barclay
Net Selling
Price
$2.96
$2.56
$2 64
Net Selling
Price
$2.64
$2.56
$2 64