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| When I replied earlier, I was just trying to make one consider where their real risk is. There can be value and reason in buying calls to protect sales, but reducing risk is not one of them.
If one has a history of giving up on hedges when markets get volatile, or has a limited amount of working capital to withstand margin, and sleep well at night, calls may have a place.
If one has a hard time making sales in volatile markets, but is more comfortable pulling the trigger if a call is already in place, there is merit to such ownership.
In your example, it would be possible to have a near $2 rally into expiration, deliver $10 beans in a $12 market, and have ownership of a worthless call. HOWEVER, one would also have the opportunity to make sales at an even more profitable level in deferred contract years.
A rally to over $13 would only capture +/- 1/3 of the rally. Prices could also rally sharply during the year then slide into harvest. Your $.13 call could be worth a buck or 2, but unless you suddenly decided that it was unnecessary (at a time when it might actually be most needed), and took profits, its value could dissolve to nothing at expiration.
If prices tank... $8 ..your number, your call would be worthless and your opportunity in the deferreds would not be encouraging at all.
Your risk is lower prices, not higher prices. | |
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A new directon
