Min-Max Grain Contracts
A Min-Max contract establishes a minimum price protecting you against lower prices, but permitting participation if the market rallies up to a predetermined maximum price using exchange traded options. The final price of the Min-Max contract will be the minimum price plus any value the option positions provide if the market is above the minimum prior to the expiration of the option.
- Provides a price floor
- Has a reduced cost when compared to a Minimum Price contract as it offsets high-option premiums in exchange for a ceiling above the market
- You can set the final cash price at any time during CBOT market trading hours
- No upfront premium - Wheat Growers covers the premium and deducts it from the ending price
- Ability to roll up to higher strike prices if the market rallies to increase the minimum price level and still participate in further market appreciation
- Risk Parameters are known and costs are easily identified
Key Issues and Risks:
- Does not permit trading in and out of markets as delivery is expected
- The upside potential price of this contract is limited to the maximum price
- Depending on option strike prices and volatility, it may cost more than storage rates
- Requires selling in 5,000 bushel increments
What are the costs associated?
- To initiate a Min-Max contract it costs $0.03/bu
- The new rolling feature that allows you to improve your minimum price if the market rallies costs $0.01/bu for each roll. The amount of times you can roll your strike price is not limited.
- Producer has the option to place orders to lift off the ceiling (Max) if prices drop to levels that make economic sense. For example: If the producer sold a call option for $0.10 and is able to buy it back at $0.01 we could place an order to remove the maximum price in the event the market would rally prior to option expiration.
Contact your Grain Marketing Specialist today for more information or click here for a printable flyer.
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