Under the terms of the call option, the farmer has the option to sell his produce for $1.75 per bushel. By exercising the put option, the farmer has the choice to buy crops at a cost of $1.70 per bushel. The floor price for the farmer's plan, assuming a crop yield of 20,000 bushels, is $1,624 per bushel.
The options approach has an overall cost of $1.65 per bushel. The farmer paid a premium of $0.14 to sell a call option with a strike price of $1.75 and $0.11 to buy a put option with a strike price of $1.70.
If the selling price declines, you can always exercise your put option to set your floor price. Subtract the cost of your options after calculating your reward.
= (1.70 - 1.65)
= 0.05 * 20,000
= 1,000
= 1,000 - (0.11 - 0.14) * 20,000 * 1.04
= 1,000 - 624
= 1,000 + 624
= 1,624
The farmer has the opportunity to sell his produce for $1.75 per bushel under the terms of the call option. The farmer has the option to purchase crops at a price of $1.70 per bushel by exercising the put option. The floor for the farmer's plan is $1,624 per bushel, assuming a crop yield of 20,000 bushels. This is so that the farmer has the option to sell his produce for $1.75 per bushel and to purchase it for $1.70 per bushel.
If the crop's market price falls below the floor price, the farmer will only use these rights.
His plan has a $1,624 per bushel minimum.
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