Options: Call vs Put, Premium, and Trading Completion, Study notes of Agricultural engineering

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Review Questions

A. What is the difference between a call and a put option?

B. What is the option premium?

C. What are the three choices for completing an option trade?

CASE EXAMPLE: Put Option

A producer expects to harvest 500 bales of cotton. In June, the March cotton futures is at 71

cents per pound. The producer buys a put option contract for a strike price" at-the-money," at a

premium of 4 cents per pound. As the cotton is coming up, the October crop report comes out

and says that there will be a record cotton crop. As a result, March cotton futures drop to 60

cents per pound. The put option is now up to 11 cents per pound. The producer has the option to

sell this put to someone else for a premium of 11 cents per pound.

cents/pound June: March Futures 71. March put premium 4. cents/pound October: March Futures 60. March put premium 11.

Fill in the amounts below.

cents/pound Result: March premium paid March premium received Commission charge Net gain (loss)