Your best result comes from much higher prices and

your best result comes from much higher prices and maximizing the value of soybeans
growing in the field. The put options simply serve as price insurance and, like auto insurance,
a driver is better off without accidents and payouts.
As we’ve done with earlier examples, it might help to “unwind” this hedge at harvest under
three different price scenarios: flat prices (November futures do not change), lower prices
and higher prices.

152
Applied Economics 3411/5411, 2018 Lecture Notes Copyright © 2018 Edward Usset. All rights reserved.
The flat price (no change in November futures) scenario…
Buy put options to establish a minimum price on grain before harvest
Date Cash Options Basis/Min. Price
April Planting starts soon
and a producer
wants to establish a
minimum price for
soybeans at harvest
With November
futures trading at
$10.00, buy Nov
1000 puts for 61
cents/bu.
Expected harvest basis
is -$0.75, or 75 cents
under the November
contract.
Min. expected price:
10.00 strike + (-.75)
basis – .61 premium –
.01 fees = $8.63
Late September
harvest
Sell newly
harvested soybeans
for $9.28
Nov futures at $10,
sell 1000 puts for
???
Actual basis is 72 cents
under ($9.28 cash -
$10.00 futures)
Can we calculate the actual price received for soybeans at harvest? Not yet. The November
options purchased earlier will expire in mid-October. These puts will have some value
remaining, but probably not much (5-15 cents?). Should the puts be sold on the same day that
soybeans are harvested and sold? Another good question and the answer depends on the
producer’s market opinion. However the producer chooses to dispose of the options (sell
now, or wait 3 weeks for expiration?), the final price will be close to the minimum
established in April: $8.63/bu.
That was the flat price scenario. Let’s run through a different scenario. This time, the
growing season proved to be less than ideal and soybean production suffered. Less
production means less supply and higher prices.

153
Applied Economics 3411/5411, 2018 Lecture Notes Copyright © 2018 Edward Usset. All rights reserved.
The higher price scenario…
Buy put options to establish a minimum price on grain before harvest
Date Cash Options Basis/Min. Price
April Planting starts soon
and a producer
wants to establish a
minimum price for
soybeans at harvest
With November
futures trading at
$10.00, buy Nov
1000 puts for 61
cents/bu.
Expected harvest basis
is -$0.75, or 75 cents
under the November
contract.
Min. expected price:
10.00 strike + (-.75)
basis – .61 premium –
.01 fees = $8.63
Late September
harvest
Sell newly
harvested soybeans
for $10.53
November futures
at $11.25/bu., let
the 1000 puts
expire worthless
Actual basis is 72 cents
under ($9.28 cash -
$10.00 futures)
As prices trend higher, the value of a put option decreases. Why would anyone value the
right to sell soybeans at $10/bu. when the market is trading at $11.25/bu.?