How To Trade Short Term Options

How to trade short term options

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So there’s a USDA report coming out in a week and you’re not sure what it’s going to say. Is it going to be bullish and bring about an immediate rally? Is it going to be bearish and pull the bottom out from underneath prices?

What is that answer you ask? Short term options.

Nobody really knows beforehand, and that’s what makes marketing around USDA reports and other big news releases so crucial. I’m sure some of you reading know the answer and have been employing the strategy for years, and to you I say, good job keep on keeping on. However, for those of you that have struggled around these big news releases, there’s an answer that can help you better manage that short term risk.

What is that answer you ask?

Short term options.

Now I know not everybody reading is too familiar with options in the first place, so I’ll give a 30,000 foot overview of options themselves. Essentially, put options are used while holding the physical bushels in order to protect your downside and hedge against prices moving lower before you sell the bushels.

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On the flip side, call options put you in a position to profit if prices move higher, and are typically used to re-own bushels after you make sales. That’s an overview of options as a whole, but what are short term options?

How to trade short term options

Well there are two kinds: weekly options & short dated options. Both weekly put options and short dated put options serve the same purpose as their full dated counterparts, which is to protect downside risk.

Similarly, both weekly call options and short dated call options serve the same purpose as their full dated counterparts, which is to provide you with upside potential.

The only difference is the amount of time the option gives you.

To give you an example, the full dated December corn option has an expiration of November 23rd, 2018.

On the other hand, there are weekly options & short dated options off that December corn contract that have expirations before that November 23rd date. There are short dated options that expire September 21st, October 26th, as well as weekly options that expire at the end of different weeks in between leading up to that November 23rd date.

So the question is: why would you buy one of these instead of just purchasing the full dated option?

Well the answer to that is simple: the cost. Some of the short term options can cost as little as a quarter of the price of their full dated counterparts.

Say there’s a USDA report coming out at the end of the week.

How to trade short term options

Prices aren’t at levels you’re comfortable selling at, but you want to make sure that you at least protect the bushels you’re still holding against a potential price drop on a bearish report. You could buy the full dated put option, but it’s going to cost you for all that time value in the option.

How to trade short term options

Or, you could buy the weekly put option that expires at the end of the week, which gives you that downside protection through the report and is a fraction of the cost. You have that downside protection in case of a bearish report, but you’re not paying through the nose for it.

Using a similar strategy with call options can be just as useful.

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Let’s say that report is coming out at the end of the week, but you just sold some bushels to generate cash flow. You’re not sure if there might be bullish news in the report, but you are sure that if there is, then you don’t want to miss out.

What can you do? Well you can buy a full dated call option to give yourself that upside, but similar to the put I talked about above, you’re going to have to pony up some money to do it. You don’t want to pay for all that time value, so you pony up just a fraction of the cost, and get a call option that expires at the end of the week to leave that upside open through the report.

How to trade short term options

You can sleep easy knowing that if the report turns out to be bullish, that you’ll be able to take advantage and not have remorse for selling your physical bushels beforehand.

Now you might be asking, well what happens if these news releases comes in neutral and the option expires worthless? Well that’s the beauty of the weekly & short dated options, even if they expire worthless, you have the comfort from knowing that they didn’t cost you a whole lot on the front end.

Nobody knows where the markets are going to go after big news releases, so if you can protect yourself from being on the wrong side of it, doesn’t that sound advantageous?

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How to trade short term options

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