Taking a look at expired May options

With good weather forecasts this week for both corn and wheat, the market pulled back. Right now, it’s likely most of the corn might be planted in a normal time period.

Some are saying the recent milo/sorghum tariff issue is putting pressure on corn prices. If China ultimately doesn’t buy their usual share, milo would need to compete with corn for feed demand domestically, potentially increasing corn carryout by 10%. While this would be negative in the short term, I’m not as concerned long term. If U.S. farmers only plant 88 million acres at a 174 average national yield, carryout could drop to around 1.4 billion without the additional milo carryout, and near 1.8 billion with milo in the carryout. Either way, this is much less than the current 2.1 billion and the 2.4 billion corn carryout last fall, which didn’t include the milo carryout.

Corn seems to have a lot of potential as the growing season begins. However, with El Niño and La Niña not likely being much of a factor this year, there is still a good chance for record yields. If this happens, prices could easily slide back down to 2017 harvest price levels.

 

Market action — Expired May options

I had several May options expire on Friday and the results are detailed below. As always, I like to report the results of all trades (good and bad), not only to be fully transparent, but also because there is a lot to learn in reviewing the final outcomes of actual trades, rather than theoretical ideas or general market statements.

May Option 1: Sold straddle

On 1/19/18 when May corn was $3.60, I sold a straddle for 10% of my ’17 production

  • Sold May $3.50 straddle — I sold both a $3.50 put, a $3.50 call and bought a $3.40 put — collecting a 17-cent premium
  • Trade Expiration 4/20/18
  • Potential benefit: If May futures close at $3.50 on 4/20/18, I keep all of the 17-cent premium
  • Potential concern: Reduced or no premium if the market moves significantly in either direction
  • On every trade, I know, and am willing to accept every possible outcome: For every penny lower than $3.50 I get less premium until $3.40. At this point I will make no less than 7 cents profit on this trade. For every penny higher than $3.50 I get less premium until $3.67. At $3.67 or higher I have to make a corn sale at $3.50 against May futures, but I still get to keep the 17 cents so it’s like selling $3.67.

 

What does this mean?

I am most profitable on this trade if the market stays sideways until the end of April. If this happens, I will take the additional premium and add it to my “pot of premium” I’ve been collecting by selling options during the long-term sideways market. If the market rallies, I will have to sell some grain at higher levels than where prices are in mid-January.

If corn falls below $3.40 on 4/20/18, it isn’t as ideal, but I still wouldn’t lose any money on this trade. In fact, worst case scenario is that I still make 7 cents on the trade, but I won’t have sold any grain. Long term I think prices can go higher, but recently the market has moved little from $3.50 area.

 

What happened?

The market rallied nicely since mid-January. On Friday it closed well above $3.67, so I let the sold call option of the straddle get exercised. I’m glad the market is higher than in January, so this additional 10% sale means I’m 40% sold on my ’17 production.

 

May Options 2: Sold call

On 1/22/18 when May corn traded at $3.60 I sold a May $3.60 call for 10 cents on 10% of my ’17 production

 

What does this mean?

  • Trade expiration 4/20/18
  • If corn is trading below the $3.60 strike price when this option expires I would keep the 10 cent premium and add it to another trade later.
  • If corn is trading above the $3.60 strike price when this option expires I would have to sell corn for $3.60 PLUS I keep the premium, which means, I will have a sale price of $3.70.

 

What happened?

On 4/20/18 corn closed at $3.78 on May futures, I let the sold call get exercised and turn into a short futures position at $3.60 but I still get to keep the 10 cents of premium so it’s like selling $3.70. This makes my position sold on another 10% of my ’17 production. I’m now just over 50% sold.

 

May Option 3: Sold call

On 10/24/17 when May corn was near $3.70 I sold a May $3.70 call for 19 cents on 10% of my production:

What does this mean?

  • If corn was trading below $3.70 when the option expires I would keep the premium and add it to another trade later.
  • If corn was trading above $3.70 when the option expires - I would have to sell corn for $3.70, but I would keep the premium and add it to the price, thus selling corn for $3.89.

 

What happened?

On 4/18/18 when corn was trading around $3.80 I bought the call I sold for 19 cents back for 10.5 cents. After commissions I was able to collect over 7 cents of premium to add to my pot of trading premium. I did not make another sale with this trade.

 

May Option 4: Sold a straddle

On 11/27/17 when May corn futures were near $3.65, I sold a May $3.60 straddle and collected 27 cents premium on 10% of my 2017 production.

What does this mean?

  • If May corn is at $3.60 on 4/20/18 I would keep all of the 27 cents.
  • For every penny corn is below $3.60 I get less premium until $3.33. At this point I will have to remove a previous sale from my position with futures. For every penny higher than $3.60 I get less premium until $3.87.
  • $3.87 or higher I would have to make a corn sale at $3.60 against May futures, but I still get to keep the 27 cents, so it’s like selling $3.87

 

What happened?

On 4/18/18, when corn was trading around $3.80, I bought the $3.60 call portion of the straddle back for 20 cents. After Friday 4/20/18 with corn still above $3.60, the puts expired worthless and I net a 6 cent profit after commissions to add to my pot of trading premium. Again no additional sale of corn was made.

 

My take away from my May options trades

With these four trades I ended up only selling an additional 20% of my 2017 production for an average price of $3.685. With trades 1 and 2 selling 20% of my ’17 production, I decided to take a little bit of profit on trades 3 and 4, instead of selling more because I think there is upside potential in the market right now and I want to be in a position to sell more at higher levels. Therefore, I added the 13 cents (6 cents from trade 3 and 7 cents from trade 4) to my “pot of premium” on 10% of my production.

In hindsight I wish my sold prices were higher, knowing what I know today. However, these trades were set up to minimize my farm operation’s risk exposure and to provide a safety net if prices didn’t rally through summer. At the time I placed the trades, there seemed to be little upside potential in the market. Fortunately prices are now higher and I have more ’17/’18/’19 corn to sell. Plus, not only do I have the added premium above from trades 3 and 4, but I’ve collected additional premium from other previous trades that I can add to these sales, which will help push my final cash price to potentially profitable levels.

One might say that I would have been better off doing nothing instead of selling the options, but that’s easy to say with the benefit of 20/20 hindsight. Waiting to sell would have increased my farm operation’s risk exposure, which scares me more than missing the top of the market. What if prices hadn’t rallied and instead remained sideways like 2017? These trades would have helped earn additional value for my farm in an unprofitable market. Having a marketing plan that does not take into consideration the potential for a sideways market (or long-term decline) can be, in my opinion, short-sided and risky.

 

New trades

As I said above, I think there is upside potential in the market right now, so I placed the following two trades to try and take advantage of opportunities that may become available.

New Trade 1: Sold straddle

With the above sold calls removed, on 4/17/18 when July corn was around $3.88, I sold a July $4.10 straddle (sold both the put and the call) and collected 34 cents total on 10% of my production.

 

What does this mean?

  • If July corn is at $4.10 at expiration on 6/23/18 I keep all of the 34 cents.
  • For every penny corn is below $4.10, I get less premium until $3.76. At this point I will have to remove a sale through the process of having to buy back futures. For every penny higher than $4.10 I get less premium until $4.44. At $4.44 or higher  I have to make a corn sale at $4.10 against July futures, but I still get to keep the 34 cents so it’s like selling $4.44.

As with all straddles, this trade is most profitable if corn stays sideways. And while I think corn has upside potential, I don’t think it’s likely to rally higher than the top of this straddle’s range (but I’ll obviously be happy if it does). The biggest concern of this trade is the downside. Corn demand will have to stay strong and a weather scare would also help. However, even this week May corn didn’t drop below the lower limits of this new trade, so I feel pretty good that corn will be between $3.76 and $4.44 at the end of June. But since I did sell 20% of my corn this week I feel that buying back some of that sale is acceptable risk for the potential reward in this trade to the upside.

 

New Trade 2: Sold straddle

On 4/17/18 with Sep corn around $4, I sold a Sep $4 straddle (selling both a put and call) and bought a $3.60 Sep put, collecting 41 cents total on 10% of my 2017 production.

 

What does this mean?

  • If Sep corn is at $4.00 at expiration on 8/24/18 I keep all of the 41 cents.
  • For every penny corn is below $4 I get less premium until $3.60. With the $3.60 put I will lose nothing on this trade, but I don’t have any grain protected to the downside or sold. For every penny higher than $4.00 I get less premium until $4.41 At $4.41 or higher I have to make a corn sale at $4.00 against Sep futures, but I still get to keep the 41 cents so it’s like selling $4.41.

Again, this trade is most profitable in a sideways market, but I’m also protected from losing money, or buying corn back, if the market drops significantly. I’ll be happy with a $4.41 sold price, if the market rallies. But, if the market stays sideways, I’ll be just as happy collecting the premium and adding it to a later opportunity.

 

Adjusting marketing strategies to new market dynamic

The market dynamics have changed significantly recently, reaching levels that seemed unattainable four months ago. That’s why it’s important to have a marketing plan that adapts to new information. And while it’s important to review the results of each trade and learn from the past, one shouldn’t dwell too much on the past either (positive or negative results). There is always more corn to sell, and no one knows if the market will go up, down or sideways. The only thing farmers can do is always be looking for opportunities that become available in the market that help to try and achieve profitability while minimizing risk exposure.

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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