No offset The pilot program rules do not permit option holders to offset their positions with a cash transaction prior to maturity. The inability to offset makes trade options less liquid than exchange traded counterparts. The requirement of physical settlement is designed to guarantee the option holders are actually in the business using the underlying commodity and not the option market exclusively for speculation. Furthermore, the lack of offset produces economic inefficiencies. Without offset the farmer must either forfeit the value of the put, or purchase the product from a neighbor with a successful harvest and then use that product to exercise his put.
Direct offset is much more reasonable.
Conclusions Agricultural trade options can provide a valuable risk-shifting service to producers. This service can be provided without injury to the liquidity and price discovery of current on-exchange products. The lack of success of the pilot program is discouraging. Nonetheless, I am hopeful that with modest adjustments a regulatory framework can be established that will permit a robust and secure agricultural trade option market to develop and succeed.