# Buying a Put A producer purchases a February \$138 put option @ \$5.75/cwt to price a group of…

A producer purchases a February \$138 put option @ \$5.75/cwt to
price a group of cattle. At the time, February live cattle
futures are at \$137/cwt. Estimated basis for the end of
January is \$+2.00/cwt.

The producers estimate minimum selling price is
__________________________________.

What will happen in late January if the market goes up, stays
roughly the same, or goes down, assuming that actual basis in late
January is \$-2.00/cwt? To answer, fill in the following
table:

 If Feb. Futures are Value of 138 Put (assuming there is only intrinsic value left) 138 Put net gain/loss Local cash sale Net realized price 150 138 125

You purchase a January \$166 call option @ \$7.07/cwt to protect
the purchase price of feeder cattle that will be needed in
January. At the same time, January feeder cattle futures are
at \$165.25/cwt. Estimate basis for the end of January is
+\$5.00/cwt.

Your estimated purchase price would be
________________________________________.

What will happen in late January if the market goes up, stays
the same, or goes down, assuming that actual basis in late January
is +\$5/cwt? To answer, fill in the following table:

 If Jan. Futures are Local cash purchase Value of 166 Call (assuming there is only intrinsic value left) 166 Call net gain/loss Net realized price 180 166 140

Assume you are a corn producer. It is mid-July and
projections are for prices to decrease between now and this
fall. You have decided you would like to buy a put to hedge
the selling price for your upcoming harvest. December futures
are currently trading at \$5.39/bu.

1. Evaluate what the marketplace is offering you right now by
completing the following table (3 points):
 December put strike price Expected selling basis premium Expected price floor ITM, ATM, or OTM \$5.20 -.25 .30 \$5.40 -.25 .41 \$5.60 -.25 .53
1. Which of these strike prices is in-the-money?

1. Complete the following table to determine what your net return
would be if the December futures price in November is the price
shown in the left-hand column? Assume there is only intrinsic
value left in the premium (i.e., there is no time
value).
 December futures price Cash price Basis Net gain or loss on put (540 strike) net selling price \$5.00 -.35 \$5.40 5.05 \$6.00 -.35

Assume you are a livestock producer, and you want to protect
your purchase price for the corn you will need to buy to feed to
your animals. You want to use calls to set a price
ceiling.

1. Call options are trading at the following premiums.
Calculate the expected maximum purchase price that could be
expected with each of the following strike prices, if you expect to
pay a cash price that is 35 cents under the futures price.
Specify if each strike price is in-the-money, at-the-money, or
out-of-the-money if futures are at \$5.39/cwt.
 Strike Price Expected selling basis Premium Expected Ceiling price ITM, ATM, or OTM \$5.20 .52 \$5.40 .41 \$5.60 .33
1. Assume you purchase the \$5.40 call, and three different
scenarios of futures price when it comes time to purchase your
corn. Fill in the table below to calculate net purchase
price, assuming you pay a price that reflects a basis of
\$-.35.
 Futures Price Cash Price Net gain or Loss on Call (540 strike) Net Purchase Price \$5.00 \$5.50 \$6.00

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