Where deliverable grain supplies are small, the markets can become especially turbulent. This volatility can make it much more difficult to exit or roll positions and the risk of additional losses can increase substantially. Those involved with HTAs need to understand the progression for closing out a futures contract in order to best time their exits or rolls from the September. Key dates are as follows:
AUGUST 19-23 -- PREPARATION FOR EXPIRATION OF THE SEPTEMBER OPTIONS
During this period, the market begins to prepare for contract expiration. Those still holding September futures contracts or options begin to deal with their positions. This can create unpredictable price and spread changes.
AUGUST 23 -- OPTIONS EXPIRE AT THE MARKET CLOSE
Those who have bought September puts or calls assess their position and determine whether they will exercise them. Those options which have positive economic value as futures contracts (known as "in the money") can be converted to futures contracts. Holders of "in the money options" have the right to exercise them and thus to become September futures contract holders.
SATURDAY, AUGUST 24 -- RIGHT TO EXERCISE OPTIONS EXPIRES
The longs with "in the money" options have until 2:00 p.m. to exercise their options and convert them to September futures positions. Any options not exercised prior to 2:00 p.m. are expired and no longer a part of the market.
MONDAY, AUGUST 26 -- ALL "IN THE MONEY" OPTIONS EXERCISED BECOME NEW FUTURES CONTRACTS
The market now has a new futures contract for each "in the money" option converted. The number of these new contracts which can come into play is at present unknown since the market during the transition period determines which options will be "in the money" and which will not. For similar reasons, which side of the market they are on is unknown. Thus after August 23, the nature of the market can be changed depending on how many options are exercised, the side of the market they hold and the type of trader holding the new contracts.
FRIDAY, AUGUST 30 -- FIRST NOTICE OF DELIVERY PERIOD - LIMITS GO OFF
The delivery period begins at the market opening on August 30 and remaining positions begin to trade without daily limits. The pricing in this period can become quite volatile. Long positions capable of taking delivery are especially strong when deliverable supplies are tight and elevator capacity at the delivery point is limited. Weak short positions (sellers without deliverable grain behind their position) can be especially vulnerable during this period.
FRIDAY, SEPTEMBER 19 -- THE SEPTEMBER CONTRACT EXPIRES
At this time, all positions must be closed out either through offset or delivery.
HTA losses differ from the types of loss situations commonly involved when there are legal disputes. Unlike the typical situation, the absolute sizes of the losses in most HTA positions are not fixed until the positions are closed out. The sizes of HTA losses are affected daily by moves in the market and can grow or shrink with these moves. Although there may be disagreement about how losses will be shared, it is in the interest of all parties to minimize the absolute size of the losses. Farmers and elevators need to work together in developing plans to take advantage of market opportunities to reduce losses and in carefully monitoring the markets to avoid generating significant increases in the size of the existing losses.
Larger HTA losses have the potential to create added problems for the community itself. Others (in addition to the elevator and the farmer who are direct participants in legal disputes) will be affected if the losses are not minimized. Employees, noncontracting farmers, lenders, and others in the community can be seriously hurt if efforts to minimize the absolute size of the loss take a backseat to legal disputes about how the loss is to ultimately be shared.
For more information, contact admin@econ.iastate.edu.