Trading and Hedging with Agricultural Futures and Options

Today's Premier Guidebook for Understanding Agricultural Options and Making Them a Key Part of Your Trading and Risk Management Strategy

Agricultural futures and options represent a vital niche in today's options trading world. Trading and Hedging with Agricultural Futures and Options takes an in-depth look at these valuable trading tools, and presents clear, proven strategies and techniques for both hedgers and traders to achieve their goals while minimizing risk.

Relying on nuts-and-bolts techniques and examples as opposed to the mathematical models and theory favored by other options-trading manuals this practical, hands-on book discusses many topics, including:

• How hedgers and traders can use options effectively with realistic expectations
• Methods to understand price behavior including the "Greeks" (delta, gamma, vega, and theta)
• The importance of volatility and little-known ways to make it work to your advantage

For producers and processors, agricultural futures and options are necessary components for controlling costs and hedging risks. For traders, they are proven vehicles for earning exceptional risk-adjusted profits. Whichever side of the aisle you are on, Trading and Hedging with Agricultural Futures and Options will provide you with the answers you need to effectively use these versatile tools and make them an integral part of your business.

Contents

Foreword by Willard R. Sparks, CEO, Sparks Companies ix

Acknowledgments xiii

Disclosures xv

Introduction xvii

Part I The Basics of Futures and Options 1

Chapter 1 The Terminology of Futures and Options 3

Chapter 2 Diagrams of Basic Trading Strategies 20

Chapter 3 Diagrams of Basic Hedging Strategies 51

Chapter 4 Why Futures and Options Have Value 70

Chapter 5 Option Price Behavior 81

Chapter 6 Volatility 96

Chapter 7 Option Price Behavior II: The Greeks 117

Part 2 Hedging Strategies 143

Chapter 8 Strategies for Long Hedgers 145

Chapter 9 Strategies for Short Hedgers 171

Chapter 10 Advanced Hedging Strategies 195

Part 3 Trading Strategies 223

Chapter 11 Pricing and Graphing Strategies with OP-EVALF™ 225

Chapter 12 Buying Options 244

Chapter 13 Selling Options 265

Chapter 14 Vertical Spreads 283

Chapter 15 Straddles and Strangles 303

Chapter 16 Ratio Spreads 320

Chapter 17 Conclusion 334

Index 341

JAMES B. BITTMAN is a staff instructor at The Options Institute, the education division of the Chicago Board Options Exchange (CBOE), where he teaches seminars on options to investors in the United States and Europe. He is also on the faculty at the Illinois Institute of Technology, and holds a commodity options membership at the Chicago Board of Trade (CBOT). A successful options trader for more than 20 years, Bittman also wrote the best-selling Options for the Stock Investor.

Diagrams of basic hedging and trading strategies . . . Discussions of volatility and advanced option pricing topics . . . The role of delta, gamma, theta, and vega on price movement . . . Strategies and scenarios to profit from both rising and falling markets . . . Trading and Hedging with Agricultural Futures and Options will help traders and hedgers understand how agricultural options work, how they can be used to pursue specific hedging and trading goals, and what are the pros and cons of using individual techniques. Clear, concise, and practical, it explains every nuance of these unique and historically profitable instruments-and is today's most comprehensive, easy-to-understand resource for all traders, regardless of their goals and objectives.

Markets in commodity futures and options first arose-and continue to exist-as tools for commodity producers and commodity processors to manage risk. Along the way, traders and speculators discovered their value as instruments for producing consistently superior gains. For both groups, however, authoritative and understandable information has been difficult, if not impossible, to find.

Trading and Hedging with Agricultural Futures and Options provides the information you need to get the most benefit from your trading program. Written by James Bittman, one of today's leading teachers and strategists on the effective use of futures and options, this long awaited book is divided into three sections:

• The Basics of Futures and Options—The vocabulary, mechanics, value components, and price behavior of these dynamic instruments
• Hedging Strategies—A five-step process illustrating fundamental strategies for both long and short hedgers, with a chapter devoted to advanced hedging strategies
• Trading Strategies—Explanations of how to develop realistic expectations and analyze trading alternatives, including use of the OP-EVALF computer program