ABSTRACT
Agricultural options were periodically traded and banned between 1887 and 1936, at which time Congress completely banned the trading of agricultural options by enacting the Commodity Exchange Act of 1936. The problems seemed to stem from the lack of one specific governing body. After the gold incident, the Commodity Futures Trading Commission was given full control of all commodity futures and options trading. The development of options, in some cases, complements and, in others, substitutes for futures hedges, depending on the individual’s risk aversion and potential return. Long option contracts are analogous to buying price insurance, with the cost of the insurance being the premium. Traders with long option positions have three basic choices that must be made during the life of the contract: exercise the option, offset the option, or let the option expire. Merchants can offer a forward contract with a floor or ceiling price by incorporating the use of options.
