The purpose of this study is to analyze the trade-off between time to maturity and volatility in option pricing as witnessed in the corn and cotton markets in the relevant past. Further, it is to identify potential correlations with higher relative futures price levels.

Options and futures are tools which allow producers to better manage price risk faced. The growing and harvesting of crops is inherently risky and the price received for commodities is often volatile. Weather, pestilence and consumer demand changes are among forces that constantly fluctuate and thereby cause market price estimations and actual price received to vary widely. The ability to purchase an option allows producers to establish an approximate minimum price with the opportunity for a higher return if the market price rises. The option, when purchased, can act as price insurance for the producer. By knowing the minimum sale price (subject to basis risk) the producer can make production and marketing decisions months before harvest. Because a premium is required to purchase an option a producer will rarely result in maximum price received; however, the option provides a safety net against price risk.