Get to know Agricultural Options on Futures

CME Group provides a wide array of liquid Agricultural options products that offer flexibility for effective risk management, as well as a multitude of trading opportunities. The diverse selection of options on Grains, Oilseeds, Livestock and Dairy products range from outright options and spread options, to cost-effective short-term alternatives.

In this module we will take a look at the various types of Agricultural options available and the features and benefits that make them valuable tools for hedgers and traders.

First of all, there are standard options traded on every Agricultural futures contract, with an option listed that corresponds to each futures delivery month.

For Agricultural futures contracts with physical delivery, standard options expire the month prior to the corresponding futures delivery month.

EXAMPLE

For example, July Wheat options expire in June.

However, for cash-settled Agricultural futures, such as Livestock and Dairy futures, standard options expire the same day as the underlying futures contract.

Other types of Agricultural options may have features that differ from those of standard options, but the main element that distinguishes all of them is the option’s lifespan or the amount of time until an option is scheduled to expire.  This is important because the longer amount of time until an option expires, the higher the price or premium of that option.

Like standard options, serial options are listed on every Agricultural futures contract, except for Dairy products. They provide an alternative for those seeking to trade options during a month when a futures contract is not listed. Serial options exercise into the nearby futures contract.

EXAMPLE

Although there is no October futures delivery month listed for Soybeans, you could still trade an October serial option that exercises into the November Soybean futures contract.

Serial options are often used to extend a hedge from one month to the next, and since the time frame is shorter than for a standard option, the option price tends to be lower also.

Short-Dated New Crop options provide a shorter term alternative for trading new crop Corn, Soybeans, Soybean Oil, Soybean Meal and Chicago Soft Red Winter and KC Hard Red Winter wheat. There are also South American Short-Dated New Crop options that are designed to match the new crop Soybean cycle in the southern hemisphere. 

Short-Dated New Crop options reference the new crop futures month, the futures month denoting grain in the upcoming harvest, but they expire earlier than the standard options. For example, there is a July Short-Dated New Crop Corn option that expires into the next December Corn futures contract. 

Due to this earlier expiration, the amount of time until option expiration is shorter than for a standard December Corn option, so the July Short-Dated option will trade at a lower price than the standard December option. This allows you to manage specific risks during the growing season at a relatively lower cost. 

Like Short-Dated New Crop options, weekly options provide an option alternative with a very short duration—in this case, from 28 days down to just a few days.

There is a weekly option listed that expires every Friday that is not also an expiration for a standard or serial option.

Because of the very short term nature of their exposure, they allow trading based on market moves that occur in specific time frames, as well as targeted risk management strategies around high impact events – such as the release of USDA reports. Weekly options are available on Corn, Soybeans, Soybean Meal, Soybean Oil and Chicago Soft Red Winter and KC Hard Red Winter wheat.

Calendar Spread Options (CSOs) are based on the price differentials between two delivery months of the same Grain or Oilseed futures contract. They feature smaller strike price intervals than standard options, so they allow more precise hedging of calendar spread risk.

And since CSOs are sensitive only to the value and volatility of the spread itself, rather than the grains or oilseeds market, they offer more efficient protection against adverse movements in calendar spreads, while still providing access to favorable spread changes.  

For those interested in trading Agricultural options there are several alternatives available that cater to almost every need.