Dealer Option

Derivatives of futures trading on the COMEX or some other exchange accounts for 80% of total contracts. They usually close out or expire worthless. However, the basics of future contracts on commodities dates back centuries, and has been tied to physical deliveries. The dealer option is a futures contract traded over the counter, and is usually designed to be a price hedge for a buyer and a seller against future fluctuations in the market. The futures contract is made for 3 months or more based on a price that is off market. If the market price at the date of expiration is below that of the contract, the seller keeps the premium. If the price is higher, than the buyer executes the contract and the seller provides the commodity for delivery.

The fluctuation of wheat prices affects many staples and foods, from breads and rolls to pizza, noodles and cakes. Companies that prudently utilize dealer option contracts are able to maintain or incrementally modify prices for their wheat-based goods, and pass them on through the supply chain. Those that don’t...run the risk of being squeezed between rising costs and keeping prices competitive with their competition. However, when the pizza parlor or bakery raised prices by 25-30% overnight, that’s probably just price gouging.