AbstractThis paper analyzes production, hedging, and speculative decisions when both futures and options can be used in an expected utility model of price and basis uncertainty. When futures and option prices are unbiased, optimal hedging requires only futures (options are redundant). Options are used together with futures as speculative tools when market prices are perceived as biased. Straddles are used to speculate on beliefs about price volatility and to hedge the futures position used to speculate on beliefs about the expected value of the futures price. Mean‐variance analysis in general is not consistent with expected utility when options are allowed.