Wheat put options give a buyer exposure to falling futures prices. Follow one contract from premium paid to its result at expiration.
How wheat options work
The examples use options on Chicago soft red winter wheat futures. A call gives the right to enter a long futures position at the strike price. A put gives the right to enter a short futures position at that price.
A flour mill may buy wheat calls, but it must match the wheat class to its purchases. A bread-wheat hedge may not track Chicago wheat perfectly.
The cost of one option
One CBOT contract represents 5,000 bushels. The exchange quotes this product in cents per bushel; the examples convert those quotes into dollars. A premium of 25 cents equals $0.25 per bushel. At a premium of $0.25 per bushel, one option costs $1,250 ($0.25 × 5,000).
Assume the futures price and strike are both $6 per bushel. The call and put premiums are each $0.25 for comparison, not current quotes. Results below are at expiration, before fees, with any futures position from exercise immediately closed at the stated price.
Buying wheat puts
If you expect prices to fall instead, buying one $6 put costs $1,250 in this example.
At a futures price of $5.25 per bushel, selling at the strike gives an advantage of $0.75 per bushel. The option is worth $3,750 at expiration, leaving a $2,500 net profit after the premium.
At $6 or above, the put expires worthless. Breakeven is $5.75 per bushel. At $5.875, the price has fallen, but the put still loses $625: the move has not covered its premium.
Before expiration
An option can be sold to close before expiration when a market is available. Its price then includes the effect of remaining time and implied volatility, so an earlier trade need not break even at the expiration price calculated above.
The purchased option can lose its whole premium. Exercise can create a futures position requiring margin and exposing you to further gains or losses. An uncovered seller can lose more than the premium received.
Wheat price chart
OANDA Wheat CFD reference price. This broker CFD (contract for difference) is a market reference, not a spot price or an exchange futures contract. Prices and quoting units may differ from the contracts described in this guide. Check the widget timestamp and market status; prices may be delayed.
