Using straddles in a sideways market, both new and review

Corn

Corn traded within a 10-cent range this previous week, ending 1 cent lower than last week. The Dec futures low at $3.44 continues to hold as the bottom for the year so far. If this holds for another week or two, there is a chance this will be the year’s low.

Early yield reports indicate yields are as expected or better than what farmers were thinking a month ago. Prices of $4 will be difficult on the Dec or Mar futures if this yield trend continues. I’m looking for corn to be range-bound between $3.45 to $3.75 through Christmas.

 

Soybeans

Despite harvest getting into full swing this previous week, soybeans increased another 16 cents. Basis levels continue to widen to last year’s harvest levels. Spreads between contract months are still wide, indicating plenty of supply and encouraging storage. This type of market action doesn’t make sense from a fundamental point of view and could be an indication that beans might be looking at a seasonal top. Based upon futures being down 10 cents this morning the market might be paying attention to fundamentals.

Brazil and Argentina bean planting has had a slow start due to weather, but there is still plenty of time. Forecasts suggest better weather is coming. Two weeks from now South American weather will be the most important market driver for soybeans.

 

Market action: Added profits from selling calls

Last Friday Oct options expired. The following details the results of my Oct trades affected.

On 6/30 after the USDA report was released (Dec futures were around $3.85), I sold a $3.80 Oct call for 19.5 cents on 5% of my ’17 corn production. What does this mean?

• If Dec corn was above $3.80 on 9/22 I have to sell corn for $3.80 and keep 19.5 cents ($3.995 total).

• If Dec corn was below $3.80 on 9/22 I keep the 19.5 cents to use on another trade in the future.

On 8/24/17 (Dec corn was $3.55), I sold an Oct $3.55 call on 10% of my production for 8.5 cents. What does this mean?

• If Dec corn was above $3.55 on 9/22 I have to sell corn for $3.55 and keep the 8.5 cents ($3.635 total).

• If Dec corn was below $3.55 on 9/22 I keep the 8.5 cents to use on another trade in the future.

What happened? Corn closed at $3.535, so both options expired worthless. I keep all the premium from both trades that I will add to a future trade.

 

Using straddles in a sideways market: New 2017 trades

Like many farmers, I wish I had more corn sold for above $4. But, I don’t and sitting around hoping corn goes above $4 is not a marketing plan. It’s time to analyze my options with the current market conditions. I had some success in 2016 with adding premium using straddles, so I reviewed my options for 2017. I think there is a good chance the market will stay sideways for a while. Using straddles can be complicated, but they can also be profitable when there is little price movement. Generally speaking, following details what happens with a straddle trade:

  • Market sideways: I collect significant premium that can be added to a future sale, which will help me hit profitable price points in a sideways market.
  • Market goes up: I have to make a sale at the top of a range I specify through the sale of a straddle.
  • Market goes down: I will have to remove a previous sale, which would be a little disappointing. However, I still get to collect much of the straddle premium. If the market rallies in the future then this trade can still end up being profitable so I think my risk is limited with the added risk of this type of trade.

As always, I’m hoping the market goes up, but I’m preparing if it doesn’t.

Following are the trade details.

 

Trade 1: On 9/19/17 I sold a Nov $3.55 straddle for 17 cents (I sold the $3.55 put and the $3.55 call and collected a total of 17 cents) for 10% of my production. The trade expires 10/27/17. The market will likely find a bottom and bounce off of it in the next month.

  • Potential benefit — If Dec futures close at $3.55 on 10/27, I keep the 17-cent premium
  • Potential concern — Reduced or no premium if the market moves significantly in either direction.

• For every penny lower than $3.55 I get less premium until $3.38. At $3.38 or lower a new crop corn sale is removed, but any profits gained on that trade can be added to a future sale. For every penny higher than $3.55 I get less premium until $3.72. At $3.72 or higher I have to make a corn sale at $3.72 against Dec futures.

 

Trade 2: On 8/30/17 I sold a March $3.70 straddle for 38 cents (I sold the $3.70 put and the $3.70 call and collected a total of 38 cents) for 10% of my production. The trade expires 2/23/18. For late February, I’m expecting a small rally but in general I expect another sideways market similar to last year.

  • Potential benefit — If March futures close at $3.70 on 2/23/18, I keep the 38-cent premium.
  • Potential concern — Reduced or no premium if the market moves significantly in either direction.

• For every penny lower than $3.70 I get less premium until $3.32. At $3.32 or lower a new crop corn sale is removed, but any profits gained on that trade can be added to a future sale. For every penny higher than $3.70 I get less premium until $4.08. At $4.08 or higher I have to make a corn sale at $4.08 against March futures.

 

Trade 3: On 8/30/17 I sold a July $3.80 straddle for 50 cents (I sold the $3.80 put and the $3.80 call and collected a total of 50 cents). The trade expires 6/22/18. I’m expecting another sideways market similar to last year in late February.

  • Potential benefit — If July futures close at $3.80 on 6/22/18, I keep the 50-cent premium.
  • Potential concern — Reduced or no premium if the market moves significantly in either direction.

• For every penny lower than $3.80 I get less premium until $3.30. At $3.30 or lower a new crop corn sale is removed, but any profits gained on that trade can be added to a future sale. For every penny higher than $3.80 I get less premium until $4.30. At $4.30 or higher I have to make a corn sale at $4.30 against July futures.

Trade 4: (Non-Straddle) On 8/31/17 when the market rallied off of the low for the year, I sold a $4 July corn call for 19 cents on 5% of my 2017 production.What does this mean?

• If July corn is above $4 on 6/23 I have to sell corn for $4 and keep 19 cents ($4.19 total).

• If July corn is below $4 on 6/23 I keep the 19 cents to use on another trade in the future.

I hope corn rallies above $4 before July, but based upon the market recently and what I know today, there is a strong possibility it might not. Therefore, I want to collect premium on a small portion of my production if what I hope doesn’t happen happens.

 

What does all of this mean?

I have basically placed a “bet” on 35% of my 2017 production that prices will not be above an average of $4.15 (including carry on the Dec and March trade) at the end of next June. The following summarizes what happens based upon where the market is at the end of June:

  • If corn is above $4.15 I have to sell at that price.
  • If corn stays between $3.60 and $3.80 I will collect enough premium with these trades to still get around $4 for 35% of my production.
  • If corn is below $3.30, that would be disappointing. I would still collect a lot of the premium from the straddle. However I would have to remove some previous sales. This could result in some additional profit, but it would be less than just keeping the previous sales in place. Because the markets typically don’t hit their low in the Spring and early Summer this isn’t something I’m overly worried about today with the information I have, but I’m prepared if it does.

Most farmers are hoping corn futures go to $4.20 or even $4.50 by next summer. Me too! I will still get to sell a significant amount of my 2017 crop at those price levels and I could start locking in next year at the same prices or even better. If prices DON’T get to $4.20 or $4.50 I have a plan in place that keeps my farm operation profitable.

 

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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