Discussion
This graph shows daily settlement prices for Dec’11 futures from about fourteen months out through expiration (blue line). The green and red lines show the premium value associated with 130-cent put and call options, respectively. The Dec’11 contract was pulled to its high over 140 cents in concert with the major rally of 2010/11. However, after the panic commercial buying subsided, the cotton market responded to high prices with expected increases in production and decreases in consumption. This was reflected by weakening prices in the summer of 2011. It should be noted that this a weakening of unprecedented high prices to simply strong prices around 100 cents per pound. Obviously, buying an 130 cent put option would have been very expensive insurance that paid off, in this instance. There were a number of instances during 2011 when put spread combinations (i.e., buying a near the money put and selling an out of the money put) would have been applicable.

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