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There are several factors that could push or pull acres from one crop to another, including high impact events such as weather and geopolitical risks. Oliver Sloup, explains how farmers can use New Crop Weekly Options ahead of the Prospective Plantings report.

 

Managing short-term new crop exposure

CME Group offers a wide array of liquid Grain and Oilseed options products, providing you the flexibility to manage your risk or take advantage of trading opportunities.

If you’re looking to manage short-term risk in the grains market, look no further than the CME Group New Crop Weekly options.

New Crop Weekly options allow market participants to manage their “new crop” risk over a much shorter time horizon.

Since shorter-term contracts have cheaper options premium, market participants will now be able to manage their short-term risk exposure in an even more affordable way.

How they work

Let’s look at how New Crop Weekly options compare to Short-Dated New Crop options as well as the standard and weekly options.

If you recall, standard options for Corn, Soybeans, and Wheat futures expire the month prior to the corresponding futures delivery month. In this example, the next monthly standard option is July.

There are also 5 Weekly options for the standard July delivery month. The “new crop” is the futures month denoting grain in the upcoming harvest in North America.  For Corn the New Crop is December and for Soybeans it is November. 

Short Dated New Crop options expire earlier than a standard option. An example of this would be December Corn underlying with monthly expiries in June, July, August, and September.

New Crop Weekly options offer additional granularity to manage short-term risk on the “new crop” future.

New Crop Weekly options expire each Friday, for three weeks, against the “new crop” expiration month.

Example

Let’s look at an example how this would work.

Assume it’s mid-March and a corn producer is concerned about their input costs for the coming crop year.

The March 31 “planting intentions” report can have a large impact on the price of corn. To offset the possibility of a steep decline in corn price, our producer can purchase a New Crop Weekly option based on the December contract. Since the “planting intentions” report happens to come out on a Friday, the option would expire the same exact day, giving the producer a precise hedge.

If the producer did not have the New Crop Weekly option, they would have chosen from either a May Short-Dated New Crop or a standard December option.

The Short-Dated New Crop options have an additional three weeks of coverage beyond the planting intentions report, and the standard December contract does not expire for another eight months. 

A large component of on options premium is based on time. Given New Crop Weekly options expire every Friday, participants can have a very cost-effective hedge.

It is important to note that New Crop options have the same tick size and strike increments as standard and Short-Dated New Crop options.

These contracts are listed for three consecutive weeks, February through August. And there’s no weekly contract listed the same week as the Short Dated New Crop expiration.

New Crop Weekly options features

• Same tick size
• Same strike increments
• Three consecutive weeks Feb-Aug
• Hedge short-term events

This makes it very easy to fine-tune your exposure or spread your positions depending upon your risk.

Additionally, New Crop Weekly options are very effective around specific events and can be used as an overlay hedge to help maximize short-term trends.

Source: CME Group

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