Capitalizing on a sideways market

Rumors of changes to the Renewable Fuel Standard (RFS) mandate last week shook up the markets Many question if the rumor is valid, because changing the mandate would require an act of Congress, which is not a guarantee or fast process. Regardless, this rumor is viewed as “uncertainty” to the market. With corn around $3.75, downside potential seems limited to between 25 and 50 cents, with upside potential high when weather, usage and acre potential are considered.

Funds will likely want to take advantage of this upside potential and continue to buy market dips instead of selling rallies until summer weather is better known. I expect corn to trade $3.60 to $3.90 for the next few months. Excess old crop will keep prices from going too high and reduced 2017 acres will keep prices from going too low.

 

Market Action

March options expired last Friday with futures closing at $3.63. Following details some of my trades.

On 8/22/16, I sold $3.50 March calls and collected 24 cents (10% production).

Why? I expected the market to be at or below $3.50 in late February, considering the expected 2.3 billion bushel carryout. On 2/24/17 I bought back the call for 13 cents instead of making a sale. I still think there is upside potential. Net Profit: 7 cents

On 11/22/16 I sold a $3.70 Mar Straddle for 30 cents (10% production).

Why? At the time corn was $3.40. I expected corn would be range bound ($3.40 to $4) in late February. The closer to $3.70 at expiration, the more money I made. Corn finished at $3.63 for a net profit of 23 cents.

Side note: I paid no commission on these trades, since they are off-setting trades as long as corn was trading between $3.50 to $3.70 at expiration

 

New trades I placed last week.

2/27/17: Straddle #1

  • Expected market direction is probably sideways with some upside potential into early summer.
  • Trade detail: Sold May $3.75 straddle for 23 cents, expires 4/21/17 after the acreage report, but during the heart of corn planting.
  • Potential benefit: If May futures close at $3.75 on 4/21, I keep the 23-cent premium
  • Potential concern: reduced or no premium if the market moves significantly

For every penny lower than $3.75 I get less premium until $3.52 and if it is $3.52 or lower a previous corn sale is removed, but any profits gained on that trade can be added to a future sale. For every penny higher than $3.75, I get less premium until $3.98 and if it is $3.98 or higher I have to make another corn sale at $3.98 against May futures.

 

2/27/17: Straddle #2

  • Expected market direction today is probably sideways with some upside potential into early summer.
  • Trade detail: Sold June $3.80 straddle for 30 cents, expires 5/26/17 after corn planting is complete but before the weather markets take over based upon July futures.
  • Potential benefit: If July futures close at $3.80 on 5/26, I keep the 30-cent premium
  • Potential concerns: reduced or no premium if the market moves significantly.

For every penny lower than $3.80 I get less premium until $3.50 and at $3.50 or lower a previous corn sale is removed. For every penny higher than $3.80, I get less premium until $4.10. At $4.10 or higher I have to make another corn sale at $4.10 against July futures.

This trade also allows for some flexibility. Depending on the end price I could use it against old crop I have left or move to new crop for another 20-cent premium.

I really like the flexibility these trades allow in taking advantage of upside potential while also getting premium if the market stays mostly flat. There is a chance a sale could be removed if prices drop significantly, but I still get the premium collected from previous trades. Typically the market isn’t at its lowest from April to June, so I think this unlikely. Plus, these trades are only 10% of my production, which spreads out and limits my risk.

Most farmers think sideways markets are very boring, but if you are creative they can have advantages. As always, I want the market to go up. But, in the meantime I’m going to take advantage of opportunities available if the sideways market continues.

Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

 

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