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Which Option to Buy?
By: Rick Thachuk   Wednesday, August 8, 2007 11:04 PM
Because option prices increase with time to expiration, you may want to confine your purchase to options that expire within three months or so.

Consider next, put options on corn expiring in March. Listed below are sample prices for March put options on corn having a strike price that range from 260 cents per bushel to 320 cents per bushel.

March Corn Put Options
Strike Open High Low Closing Range Settle Net Chge
260 2 2 1 3/4 1 3/4 1 3/4 -1/8 
270 4 1/4 4 1/4 3 3/4 4 to 4 1/4 4 1/8 Unch
280 8 8 1/4 7 1/2 7 3/4 7 3/4 -1/8
290 13 3/4 13 3/4 12 1/4 13 to 13 1/4 13 1/8 +1/8
300 20 1/4 20 1/2 19 20 20 Unch
310 n 27 1/2 27 1/2 -1/4
320 n 36 36 -1/8

Notice that the price of a put option depends upon the strike price. In general, put options having a high strike price will cost more than put options having a lower strike price. For example, the 310 put option costs $1,375 (calculated as 27.5 cts/bu x 5,000 bu) plus commission and fees, while the 270 put option only costs $206.25 (calculated as 4.125 cts/bu x 5,000 bu) plus commission and fees. Incidentally, the letter 'n' in the closing range indicates that the option did not trade that day. That is why there are no open, high or low prices. Even if an option does not trade, the exchange is able to determine a likely settlement value for the option using a mathematical formula. When determining which option to buy, choose one that you can afford. As in the above case, you may want to only pay between $400 and $700 for an option. Don't be tempted by inexpensive put options having a very low strike price. While they may be cheap, it is also likely that they will expire worthless, since the price of the underlying futures must fall below the strike price of the put option by the time the option expires for it to have value upon expiration.

Again, just like the case for call options, try to pick an option that falls within your price range and is near or at-the-money. For instance, corn futures settled at 286 cents/bushel, so the 280 and 290 put options are at-the-money. The 280 put option settled at 7 3/4 cents per bushel, giving it a price of $387.50 which falls within the price range. This, then, seems like a good choice. Also, as is the case with call options, put options that have a longer time until expiration will cost more. So, here again, you may want to confine your purchase to options that expire within three months or so. Finally, please be aware that there can be many more factors to consider when selecting a particular option to buy than those discussed above. The intention here is to keep the analysis simple. As you accumulate more knowledge and experience trading options, you may determine other criteria that, for you, are just as important in selecting an option.


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