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Fort Collins, CO | Cole,
Thanks for the reply. I've seen enough to know that there is always a chance of anything and everything. I guess time will tell on the predictions, though I would like to clarify that we don't generally predict the future path of prices. We use the prices we see in the futures and options markets to observe the market's implied distribution of forward prices. By connecting the dots between listed option expirations for new crop corn, we can infer a distribution for the fall insurance price. Strictly speaking, you see the market's predictions, not Quartzite's (though we do some fitting, and smoothing, so more accurately, you see our interpretation of the market's predictions). We strive not to have an opinion on the direction prices will take in the future. Opinions bring ego into the equation, and suddenly folks find themselves more concerned about being right than making money or managing risk - that's a dangerous trap we do our best to avoid. We use the information that underlies the distributions and probabilities we publish to balance each of our clients' exposure regularly - not bet to bet on which direction the market is heading.
Because yields are uncertain, options are virtually a necessary part of any hedging strategy for grain producers. If what we were hedging were simply 100k bushels of corn in a can somewhere, the problem would be much simpler, and we couldn't add much value. We do occasionally see opportunities in the various relationships between options (time, strike price, etc.). Still, we usually let these opportunities come to us naturally as we make adjustments to rebalance risk for our clients. On rare occasions, we will actively move the portfolio around to take advantage of opportunities in the options market as we see them. These trades are rarely (if ever) a guess on market direction, but rather on weird little features specific to the options market. Volatility is a mean-reverting characteristic. So on occasion, particular options might seem cheap or expensive, or the relationship between several options might seem high or low.
Where we add the most value is in our ability to measure and manage uncertain risk. Our perceived ability to pick the best hedge for the individual and situation is helpful, but that ability (if it's truly there) is not where we hang our hat. We focus on blocking and tackling. Risk management is, done well, is not a game of prediction.
One last note I'd like to add to this already long-winded response is if this sounds like a lot of trading - it can be, sometimes. That's why we charge annual fees based on acreage and work with a brokerage that charges less than $3/side for execution (including exchange and regulatory fees).
Alright, sorry that got so long - unfortunately I feel like the next one might be even longer.
Thanks for reading and thanks again for the comment,
James | |
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Weekly Corn Market Update and a *BONUS*
