Discussion
This graph shows daily settlement prices for Dec. 04 futures from
about fourteen months out through expiration. The blue and pink
lines show the premium value associated with 63-cent put and call
options, respectively. This was a year when there were split opinions
on the outlook. Some (perhaps the more conservative analysts) thought
stocks would build and prices would fall, while others thought
strong Chinese demand would keep the late-2003 price rally going
up to the 70s. As it turns out, the strong Chinese demand did not
materialize, and prices followed the normal pattern for a year
with substantially increasing carryover. This sort of event
is somewhat predictable, although you can never be absolutely sure.
You can only plan for this by purchasing inexpensive insurance
against a major price decline. One very basic way to implement
such an insurance policy would be to purchase put options in the
early/mid spring when prices tend to be at their seasonal highest.
Doing so in 2004 was a fairly inexpensive purchase (2-3 cents/lb)
which allowed many growers to capture ten cents in put value (rising
blue line) as Dec04 futures fell (red line). This ten cents was
independent of any LDP gains.
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