CHICAGO, Ill. — The CME Group will offer short-dated new-crop options (SDNCO) on the Chicago Board of Trade (CBOT) May soybeans futures contract, starting Nov. 2. This move, subject to final regulatory approvals, brings more choices for managing price risk for new-crop South American soybeans.
Producers have long used futures options to hedge against lower new-crop cash prices. "When you buy an option, you are paying for two things – the intrinsic value of the option and the time value of the option," said Brian Coffey, Kansas State University agricultural economist.
Before the introduction of SDNCO, futures crop options expired in the month of the contract. That meant if a producer bought an option on November soybeans in January, the option’s time value reflected 10 months, from January to November. Short-dated options changed the time value of the options, offering varying expiration dates. "Since the option expires sooner, its time value is less than that of a traditional option," said Coffey.
There are now short-dated options, for November CBOT soybeans, available to expire each month from January to September.
These allow a producer concerned about how summer USDA crop reports might impact November futures contract prices to purchase an SDNCO that expires with the August futures contract.
The option expiring in August would be less expensive than one expiring in November, as it has a lower time value than an option that expires with the November contract.
"In short, it allows a producer to buy price insurance for a more specific time frame and therefore pay a lower premium," said Coffey.
The introduction of SDNCO tied to the May soybean contract provides such flexibility for the new-crop contract for South American soybeans.
"The fact that CME Group is offering SDNCO to match the harvest cycle in South America shows how important South American soybean production is to the world, and how much of a factor it is in world soybean prices," said Coffey.
CBOT began offering short-dated options on November soybean contracts in 2012.
