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Ag Decision Maker Activity File A2-66

Grain Price Options Basics

Name ________________________

Using File A2-66, answer the questions below.

1) If a person buys an option, he/she has the _______, but not the _______ to exercise the option.

2) The most money an option buyer can loose if he/she buys an option is

a) the premium

b) unlimited

3) The most money an option seller (writer) can loose if he/she buys an option is

a) the premium

b) unlimited

4) If you exercise an option you are transferred to the __________ market.

5) If a person buys a call option, he/she receives the right to

a) buy

b) sell

the underlying futures contract.

6) If a person buys a put option, he/she received the right to

a) buy

b) sell

the underlying futures contract.

7) If a person sells (writes) a call option, he/she is required to

a) buy

b) sell

the underlying future contract if the option is exercised.

Ag Decision Maker Activity Continued… File A2-66

Grain Price Options Basics

8) If a person sells (writes) a put option, he/she is required to

a) buy

b) sell

the underlying future contract if the option is exercised.

9) List the three ways you can close out an option you have purchased.

a) __________

b) __________

c) __________

10) The __________ price is the price at which you enter the futures market if the option is exercised.

11) You will make money on a call option you previously purchased if the futures price is

a) above

b) below

the strike price (don’t consider premium paid previously).

12) You will make money on a put option you previously purchased if the futures price is

a) above

b) below

the strike price (don’t consider premium paid previously).

13) You loose money on a call option you have written if the futures price is

a) above

b) below

the strike price.

14) You loose money on a put option you have written if the futures price is

a) above

b) below

the strike price.

Ag Decision Maker Activity Continued… File A2-66

Grain Price Options Basics

15) If the futures price is above the strike price, a put option is considered to be

a) in-the-money

b) out-of-the-money

c) at-the-money

16) If the futures price is above the strike price, a call option is considered to be

a) in-the-money

b) out-of-the-money

c) at-the-money

17) If the futures price is below the strike price, a put option is considered to be

a) in-the-money

b) out-of-the-money

c) at-the-money

18) If the futures price is below the strike price, a call option is considered to be

a) in-the-money

b) out-of-the-money

c) at-the-money

19) If the futures price is the same as the strike price, an option is considered to be

a) in-the-money

b) out-of-the-money

c) at-the-money

20) Last month I purchased a July Soybean Call option with a strike price of $12.00 for a 30 cent premium. July futures price is currently $12.50. What is the exercise value of the option?

______________________________

Ag Decision Maker Activity Continued… File A2-66

Grain Price Options Basics

21) How much money will I make (including the cost of the premium) if I exercise the option? ______________________________

22) What is the exercise value of the option? ______________________________

23) The premium for the option above is currently 70 cents, how much will I make if I sell the option? _________________________

24) Why would someone offer me 70 cents for the option when its exercise value is only 50 cents? _________________________

25) What are two other terms for exercise value?

a) __________________

b) __________________

26) What is the term for the premium’s extra 20 cents over the exercise value?

a) __________________

27) List the three factors that affect the size of an option premium’s extrinsic value.

a) __________________

b) __________________

c) __________________

28) The longer the time period before expiration the

a) larger

b) smaller

the extrinsic value.

Ag Decision Maker Activity Continued… File A2-66

Grain Price Options Basics

29) The farther an option is in or out of the money the

a) larger

b) smaller

the extrinsic value.

30) The more volatile the future market the

a) larger

b) smaller

the extrinsic value.

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. . . and justice for all

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, and marital or family status. (Not all prohibited bases apply to all programs.) Many materials can be made available in alternative formats for ADA clients. To file a complaint of discrimination, write USDA, Office of Civil Rights, Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, DC 20250-9410 or call 202-720-5964.

Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture. Jack M. Payne, director, Cooperative Extension Service, Iowa State University of Science and Technology, Ames, Iowa.

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