Grain - Strategies – Short Combo

A breakdown of the CME guide to Hedging with Grain and Oilseed Futures and Options. Illustration on strategy combo for a Short hedge.

The following explanation and illustrations are an excerpt from CMEGroup’s publication, “Self-Study Guide to Hedging with Grain and Oilseed Futures and Options”.  As an educational supplement, watch an example using a simple online hedge calculator in our newsletter. Take a quiz to help further your knowledge. 

Strategy #4: Buy a Put and Sell a Call

Establish a Selling Price Range

This is a short hedging strategy with the net effect of creating both a floor price and a ceiling price. Let’s assume you are a soybean farmer and you have just planted your crop. The November Soybean futures contract is trading at $9.50 per bushel, and you anticipate the local basis to be 25 cents under by harvest. You like the idea of having downside price protection but if there is a market rally between now and fall, you won’t be able to take advantage of it if you’re short futures. Instead, you decide to buy a put option. You have downside protection but are not locked in if prices rise. The only catch is the option premiums are a little higher than what you’d like to spend. What you can do to offset some of the option cost is establish a “fence” or “combination” strategy. With this type of strategy, you buy a put and offset some of the premium cost by selling an out-of-themoney call option.


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However, this strategy establishes a selling price range where you can’t benefit from a price rally beyond the call strike price. The premiums for the Nov Soybean put options and the  Nov Soybean call options are:

strategy sell combo 1


The first step would be to calculate “the selling price range” under various option scenarios. This is easily done by using the following formulas:

strategy sell combo 2

After considering various alternatives, you decide to buy an at-the-money $9.50 put for 30 cents and sell an out-of-the-money $9.80 call for 21 cents. The strategy can be put on for a net debit of 9 cents per bushel, and the selling price range is well within your projected production costs plus profit margin.

strategy sell combo 3


As shown in the table above, your net selling price will vary depending on what the Nov Soybean futures price and the basis are when you offset your combination put/call (fence) strategy. What is interesting, is with the long put/short call strategy the net selling price will be anywhere from $8.16 to $8.46 provided the basis is 25 cents under.

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