Put options at a given strike price cost less (or more) in a rising (or falling) market because the the put option gives the right to have sold the underlying futures contract at a specified level.  The example above looks back at the performance of a $1.20 put option on the expired Dec’22 futures contract.  This option had intrinsic value when the underlying futures was below $1.20, like it was during the last half of 2022.  Therefore, put option premiums move opposite of the direction of the underlying futures price.  This is important because an increasing put option premium can act as an insurance payment against falling futures and (assuming a stable cash basis) falling cash prices.

Back when Dec’22 was trading at 120.10 cents per pound, the associated premium for a $1.20 put option was 10.41 cents per pound.  Buying it at that level was essentially buying the right to a 109.59 cent short futures position.  This implied a minimum cash price around 105 per pound with upside potential and no margin call exposure.  Looking back, there were several opportunities in 2022 to buy affordable and meaningful put options. 2022 was unusual in that we saw two major declines of roughly 50 cents each in five months.  This at least provides more awareness of the scope of downside price risk.  (Want to see more?  Click here to compare/contrast hedging opportunities with put options on ICE cotton futures over the last twenty years.)

2023 Example.  Frequently, insurance doesn’t pay off.  Hopefully that is true of our homeowner, auto, and life insurance.  It’s also true of price insurance.  For example, a 90-cent level put option on Dec’23 was fairly expensive throughout the planting/growing season of 2023.  Buying a 90-put on that date implied a short hedged futures position in the mid-80s but without any margin exposure.  Had there been a rally in Dec’23 futures into the low 90s, this simple hedging strategy might have become more affordable and relevant.  But the sustained rally over 90  cents never happened.  This is thus an example of buying insurance that did not have paid off, in contrast to 2022.

2024 Example.  What about looking ahead?  There certainly is downside price risk for the 2024 crop, especially if there is 10+ million acres planted and ample moisture.   The current math of Dec’24 options is expensive.  For example, buying an 85 cent strike put option on Dec’24 futures cost 9.34 cents per pound, as of April 25.  That implies a short futures position around 75 cents.  This position would have been more affordable back when Dec’24 was trading near the money.  It would similarly become more affordable and meaningful again if Dec’24 rallies back into the mid to upper 80s.