The blue line shows the settlement price of Dec’13 futures on the ICE. The scale of the futures price is on the left side of the chart, in cents per pound. The red line shows the premium associated with a $0.83 strike put option on Dec’12 futures. The scale of the options premium is on the right side of the chart, also in cents per pound. Naturally, the put option premium increases when Dec’13 futures are declining, and the put option gets cheaper when the futures price rises. During 2013 the Dec’13 futures contract rose almost ten cents during the first quarter, then traded sideways for most of the rest of the year. AS the 83 put option moved more and more “out-of-the-money” it declined in value, particularly as the time value eroded during the Fall of 2013. This example represents a situation when a) the insurance was pretty expensive to buy early in the year, but b) might have been a good buy in mid-summer, but c) probably would not have paid off anyway. Still, most folks don’t mind if they don’t collect on their homeowner’s policy or their auto policy.
Welcome to the educational website of Dr. John Robinson in the Department of Agricultural Economics at Texas A&M University.
The website focuses on farm-level implementation of strategies for Texas cotton growers to deal with yield and price risk. Contact me to receive a weekly e-mail notice of when the latest edition is posted on-line. In addition, we provide daily crop market news and commentary on Twitter (@aggie_prof) and also on the Master Marketer facebook page. We welcome your feedback and interaction in these social media.