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Taking advantage of Call skew
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J P
Posted 5/23/2019 12:44 (#7515553 - in reply to #7515480)
Subject: RE: Taking advantage of Call skew


thereaper - 5/23/2019 12:24

You are only covered to 2x the spring price. That’s where $8 comes into play. No way, shape, or form am I suggesting $8. Thats where your HPO limit is.

If you grow the bushels and you re short at 450’ then you roll them into a forward, cash, HTA or whatever fits into your operation. Last I checked elevators priced off the board so when cash in hand from sales it applies to cover margin, less basis which varies for everyone obviously.

Round numbers here for simplicity. You have 100 bu you are guaranteed under RP-HPO. You do this on all 100 bu. We get to fall and we are at $5. You only produce 90 bu. You are on the hook for $5 worth of margin (10 bu x (5-4.5)). With the HPO your new RP becomes $500 (100 bu x HP $5). Your actual revenue is $450 (90 bu x $5 HP). You will receive an indemnity of $50. $5 goes to cover margin and the additional $45 is for the 10 bu you did not produce that you were short at 450’.


I think you have the same insurance guy as century. Pretty plain to see that in the spreadsheets I posted. The problem lies in the fact that the production you grew..90 BPA in your example is now worth 5 bucks, not 4. And in the end it affects your check and your actual coverage.

Wishing you the best.

Take care
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