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Subsidized Options in a Thin Market: A Case Study of the Dairy Options Pilot Program Introduction

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  • David Buschena
  • Kevin McNew

Abstract

We explore how a thin market responds to a subsidized put option program. The United States Department of Agriculture initiated the Dairy Options Pilot Program in 1999 in an effort to provide dairy producers with real-world experiences trading options. The volume from this program represented a large share of total trades. Our empirical analysis shows that Dairy Options Pilot Program trades occurred at statistically significantly high prices, Dairy Options Pilot Program volume had a price-reducing effect on other options trades, and some brokers filled Dairy Options Pilot Program orders at relatively high prices. We also find that these brokers appear to be providing acceptable service to their producer clients.

Suggested Citation

  • David Buschena & Kevin McNew, 2008. "Subsidized Options in a Thin Market: A Case Study of the Dairy Options Pilot Program Introduction," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(1), pages 103-119.
    • Handle: RePEc:oup:revage:v:30:y:2008:i:1:p:103-119.
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    File URL: http://hdl.handle.net/10.1111/j.1467-9353.2007.00394.x
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    References listed on IDEAS

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    1. Glauber, Joseph W. & Miranda, Mario J., 1989. "Subsidized put options as alternatives to price supports," Technical Bulletins 312310, United States Department of Agriculture, Economic Research Service.
    2. Paul L. Fackler & Robert P. King, 1990. "Calibration of Option-Based Probability Assessments in Agricultural Commodity Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(1), pages 73-83.
    3. Bruce L. Gardner, 1977. "Commodity Options for Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 59(5), pages 986-992.
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    Cited by:

    1. Franken, Jason R.V. & Parcell, Joseph L., 2012. "Evaluation of Market Thinness for Hogs and Pork," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 44(4), pages 1-16, November.
    2. Marin Bozic, 2010. "Pricing Options on Commodity Futures: The Role of Weather and Storage," Working Papers 1003, The Institute of Economics, Zagreb.

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