The Commodity Futures Trading Commission yesterday ended a half-century ban on the trading of options on agricultural commodities and approved a pilot program that permits six commodity exchanges to begin options trading today.
Congress banned agricultural options in 1936 because of recurring scandals, but in 1982 authorized the CFTC to permit agricultural options trading.
The CFTC yesterday approved trading a new form of options that permits an investor to purchase the right to buy or sell a futures contract at a predetermined price for a specified period of time.
The six agricultural options approved yesterday will be traded on six different exchanges, as part of an effort to give each of the competing futures exchanges experience with the new options and an opportunity to develop trading.
The futures trading professionals hope that the appearance of agricultural options will revive the comparatively moribund commodity futures trading that underlies the options. Each of the six exchanges has promoted its option program -- with the heaviest spending coming from the Chicago Board of Trade, which will trade options on soybean futures, and the Chicago Mercantile Exchange, whose options are on livestock futures.
Robert Wilmouth, head of the National Futures Association, the self-regulatory agency of the commodities business, said he thinks trading in agricultural options will grow far more slowly than the exchanges hope.
Farmers, who are being targeted as the chief customers for the new options, "will be extremely cautious" about buying and selling options, Wilmouth predicted.
Buying or selling agricultural options is supposed to be easier to understand and less risky than buying futures contracts themselves. The only outlay an investor must make is the purchase price of the option, called a premium. By purchasing an option to buy a futures contract at a certain price, the investor can protect against adverse changes in the price of the underlying commodity futures contract without facing the possibility of being required to contribute more cash to the investment if the price moves adversely.
For example, a farmer who wanted to protect against a fall in the price of soybeans below $6 a bushel could enter into a futures contract agreeing to sell the beans at that price. That would guarantee the farmer would not receive less than $6 a bushel, but would eliminate the possibility of making a greater profit if the price rose above $6.
If the farmer were to purchase an option that gave the right to sell a futures contract at $6 a bushel and bean prices rose sharply, it still would be possible to sell the beans at a higher price by simply not exercising the option. The farmer would be out not the full difference between $6 and the actual selling price, but only the premium paid for the option.