What Are Call Options?
Call options are a valuable tool that can be used by grain producers. They are the right, but not the obligation to buy grain market futures. However, producers are frequently confused in understanding the distinction between calls and puts. Here is how to keep them straight. As a kid, how many times have you heard either your dad or your granddad say, “I am going to call up ole’ Jim and see if he wants to go fishing tomorrow. Call up. Remember, call options are used to take advantage of higher prices. For instance, call options can be used by producers to buy back cash sales that have been made because of insufficient storage, a strong basis, or the need to generate cash flow.
Call options can be bought or sold. The purchaser or a call pays a premium to a seller. The buyer thinks that the market is going higher, while the seller believes that it is headed lower. Keep in mind that sellers of options are generally speculators. If the buyer of a call spends 30 cents for the premium, this is the most that he can lose. If prices gain in value, the price of the call increases. Remember, there is no margin requirement to purchase a call as it is a right, not an obligation to buy futures. Meanwhile, the seller of the call received the 30-cent premium, which is his maximum profit. If the market goes higher, he has a loss in his position and is subject to a margin call. Theoretically, if prices rise by 10 cents, he could receive a margin call of $5,000.