 Progressive Ag Marketing
FAQ...
What is Margin Money?
Margin Money is a performance bond or good faith money that a customer needs to deposit in
their account to show their commitment to and uphold the integrity of the market.
There are two types of calls. The first is the initial margin which is needed to
hold the position. The second is maintenance margin, which is the amount that you
need to maintain in your account while in the position. They are only required when
you trade in the futures market or when you sell an option.
What is the purpose of a call option? put option?
A call gives the buyer the right but not the obligation to buy a futures contract
at a specific price in a specified month. It also allows the purchaser the chance to
retain ownership of the commodity as it allows the owner a chance to keep the upside
potential open for the commodity.
Put options give the buyer the right but not the obligation
to sell, or go short the futures at a specific price in a specified month. It also
allows the purchaser the chance to lock in a break even price with the assurance of not
having to deliver the crop just in case production doesn't meet expectations.
In both cases the purchaser's only cost is the premium he
pays for the option plus commissions to the brokerage firm.
As a producer, what can I do limit my risk against
falling price?
There are five ways that a producer can accomplish this task. The first and
easiest is to sell the commodity, but then you have no chance to recoup any increase in
prices if the market were to recover. The second and least risky method would be to
buy a put on your excepted production. This would lock in the lowest price you will
accept for your commodity and give you the opportunity to sell the actual crop anywhere
you chose. The third method would be to sell your crop at your local elevator and
buy a call option to keep your upside potential alive, thus creating a minimum price
contract. The fourth method would be to do a futures fix contract, or hedge to
arrive, at your local elevator. The down side is that you will be forced to deliver
the amount of bushels you contracted. The last, and most risky, is to sell the
futures, but then you would be subject to margin calls if the market were to recover.
Please feel free to e-mail us with your questions. randy@progressiveag.com
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