Options can be used by farmers much in the same way they use insurance. Most are familiar with the core elements of an insurance policy. The underlying asset, the level of coverage, the deductible, the length of the policy, and of course the premium you pay.
These same elements are at work when using a put option to protect the price of your production. That is right, price is the underlying asset. The level of coverage is referred to as the strike price, while the deductible is simply the difference between the current CME market price for the commodity and the strike price. The length of the policy is selected when choosing from among the contract months that are offered. For corn, those months are March, May, July, September, and December.
Anyone who has bought an insurance policy knows what premium is. When buying an option, the total premium is due at the time of purchase.
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