| Glenn Dye - 9/17/2013 07:17: in Dec Corn, how would someone decide to either buy a put option or just sell the physical and buy a call option? OTM calls aren't too big of a cost and the put option doesn't gain in value as quick as the futures price loses.
Your question relates to option skew and trading synthetics.
In some markets, puts and calls that are equidistant from at-the-money do not have the same value. If the call is slightly premium, the market is said to be "call skewed". For instance, let's say WTI is trading $100 and the $90 put is worth $5.10 and the $110 call is worth $4.90. This is an example of a market considered to be put skewed. You can buy the $90 put for $5.10, or buy the "synthetic" put for $4.90 and accomplish the same hedge.
Your second scenario of selling the physical and buying a call is known as a synthetic put. You generally get the same risk/reward as an outright put, however in some markets you can get into a cheaper hedge if the synthetic is cheaper than the real thing. I usually recommend taking advantage of synthetics when warranted, but most people don't like getting too technical with synthetics and Greeks (delta, gamma, vega, etc.). Both of these are viable options for you, it really just depends on your time frame, cash flow, and risk tolerances.
Glenn Dye - 9/17/2013 07:17: Yea if the price goes down the put option gains value but when I have to sell the physical, it doesn't seem like I'll net the same price vs. just selling the physical to begin with and buying a cheap call option.
In theory the put will not move in tandem with the underlying product (delta), however upon expiration, the gain on the put should be equal to the loss on the cash and the parity will only increase (to .99 or 1.0) as expiration nears. The trick is picking expirations that will mirror when you have to sell the physical product.
Edited by risk 9/17/2013 12:42
|
Put or call?
