Put Spreads on New Crop

On Thursday, June 6, ICE Dec’19 futures settled at 66.67 cents per pound, down from 74.42 cents per pound five weeks earlier and, down from the eighties earlier in 2018 (see the blue line in the chart below).  A 75 put on Dec’19 cost therefore rose from 4.03 cents per pound on May 2 to 9.47 cents per pound on June 6.  This is an example of how put options provide downside price insurance.

A 75:68 put spread represents a cheaper and more limited version of this downside price insurance.  This spread was worth 5.22 cents per pound (the green line below) on June 6, and would protect against the more limited risk of Dec’19 falling from 75 to 68 cents.

In hindsight, these positions would have been meaningful and affordable when Dec’19 futures were trading above the upper 70s.  In the event that the market rallies back to those levels, then these strategies would again be relevant to hedge production costs.  With Dec’10 trading around 70 cents, the hedging rationale is more along the lines of buffering a catastrophic loss.




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