Short-Dated New Crop options (SDNCs) follow the price of maize futures which will expire in July 2014, but the options themselves will be converted to futures at the end of March 2014, if they are at the price level that requires this.
“The short-dated options are cheaper because they have a shorter time horizon, but can provide farmers with greater protection against fluctuating prices specifically during the crucial growing season when the weather can make the maize market particularly volatile,” said Chris Sturgess, director of commodity derivatives at the JSE.
Maize options are contracts that give the buyer the choice, but not the obligation, to buy or sell their maize at a certain price at a certain date in the future. A put option represents an opportunity to sell, while a call option represents an opportunity to buy. Farmers in the maize market will therefore make use of put options, while millers will use call options.
Farmers use put options to fix the minimum price at which they will sell their maize. If by March the market price of maize has climbed higher than the fixed price on the option, the farmer can choose not to exercise the option and instead sell their maize at the higher market price.
But if the market price has fallen below the fixed price, also known as the strike price on the option, the JSE will exercise the option by converting it into a futures position to expire in July, and the farmer can still sell their maize at this higher fixed price.
In order to have this freedom where a floor (put option) or ceiling (call option) price is fixed by the buyer of the option, the holder of the option must pay a premium. This means options are more expensive than trading outright futures contracts, where the holder has no choice but to buy or sell. However, if the holder of the option chooses not to exercise it, this premium is their only cost.
* For more information on trading SDNCs, call +27 11 520 7535, or email [email protected].
