What are “short dated new crop options”?
Prior to a few years ago, grain traders wishing to speculate on the “new crop” price of corn, soybeans, or wheat, through options were required to purchase or sell options with expiration dates in the distant future. As a result of the excessive time value built into the option prices, short-term hedges or speculations on new crop prices were often high risk, and expensive, ventures. In response to the noted struggle, the CME Group launched a line of “short-dated new crop” options (SDNC).
According to the CME Group, short-dated new crop options provide a liquid, shorter term alternative to gaining exposure to the next growing season’s price action. If you are unfamiliar with the term “new crop”, it is simply the first futures contract month listed for trading that represents the commodity yield (supply) from the next harvest cycle.
To illustrate, corn is harvested in the fall (specifically October); thus, the December corn futures contract is the first contract month of the next growing cycle. Once we get beyond the December contract of one year, the next December becomes the “new crop”. The futures contracts with expirations prior to December (March, May, July, and September) are referred to as “old crop” because they represent the current growing cycle. In soybeans, the November contract is considered “new crop” and in CBOT wheat, the new crop contract is July.
These SDNC options differ from standard options in that they expire at various points throughout the growing cycle despite being written against a longer-dated new crop futures contract. Unlike traditional options which are tied to the next expiring futures contract, short-dated new crop options expire each month from January through September, but are tied to the upcoming December futures contract. In other words, in regard to standard options the January 2015, February 2015, and March 2015 options would be written against the March 2015 futures; the April and May options are tied to the May futures; and so on. Conversely, SDNC options expiring in January 2015, February 2015, March 2015, etc. would be tied to the December 2015 futures.