Inside the Market

Last Call for Cheap Options?

There are different ways to measure price volatility, and for the record, DTN measures two standard deviations of price movement over the most recent three months divided by the three-month moving average. The main thing to understand is the lower the volatility percentage, the narrower the range prices have traded in.

At press time, three-month volatility of soybeans is 6%, which is roughly average for the year. Corn volatility, however, is at 2%, one of the quietest market three-month periods going back several decades. Low price volatility is not a lot of fun, as there is not much to talk about or trade on when prices are so quiet. It's also no joy to own a bin full of corn and see prices not move much through winter.

Low price volatility offers in winter lower option premiums for hedging risk in the year ahead. It lowers the cost of making such bets.

For example, the cost of owning a December 2020 $3.40 corn put option is roughly 5 cents. The $3.40 put option could offer good protection from falling prices between now and Nov. 20, 2020, the day the option expires.

For soybeans, the November 2020 $8 soybean put is priced near 5 cents and may be cheaper by the time you read this. The November put option expires on Oct. 23, 2020.

Crop insurance offers benefits that put options don't, but protections levels are also down in 2020 from a year ago. Put options have their own benefits, such as a higher level of price protection that is not penalized by the success of achieving a higher yield.

Crop insurance and inexpensive put options deserve close looks in any risk-management plan, and this is a good time of year to check out option prices before corn and soybean prices get livelier this summer.

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