Hedging Strategy

Hedging Strategy

David Sparks Ph.D.
David Sparks Ph.D.
Howard Marella, is president of Icon Alternatives, a Chicago-based, alternative investment firm that specializes in futures contracts. Marella and I chatted about farmers using a hedging strategy.

Hedging with options instead of futures alone can provide several benefits, including less financial strain, lower risk and generally lower  costs. According to Howard Marella, president of alternative investing firm Icon Alternatives, the cost to adjust and maintain hedging strategies using only futures can be significantly higher than options.

“Supporting a hedge in hopes that it may turn around is quite expensive, and can turn farmers away from hedging,” says Marella. “However, if they hedge using options, it can open much more flexibility. It’s less of a strain on finances and there is a greater possibility of turning a profit.”

Rigidity of Futures

Futures carry a larger upfront cost, which means the hedger will need to keep that amount of funds, or more, in their account to maintain the position. If the market moves against the investor, then they will have to continually place money behind it to maintain the hedge, which is not always feasible for farmers or businesses with tight margins.

Flexibility of Options

An immediate benefit of hedging with options is the cost can be defined upfront, effectively removing the surprise of unwanted extra expenses. Positions can also be established with limited cost, regardless if the market moves for or against the hedger. Should it swing against the investor, they won’t be forced to continually support a losing hedge. The investor can simply adjust their position to be in a better spot to capitalize on the movements of the market.

Benefits of Options

Hedging with options can allow an investor to keep finances stable with less of a strain. It also has the possibility of generating more money than hedging with only futures. Hedging with options can be less stressful and allows the investor the flexibility to adjust their strategy according to the natural market fluctuations that occur throughout the season.

Previous ReportCranberries
Next ReportMosquitoes biting horses