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Taking a look at past and present trades

By Jon Scheve, Superior Feed Ingredients, LLC

I suspect everyone is waiting for the Aug. 10 USDA report that includes estimated ear weights and yields. I think if the average national yield is 175, $4 Dec corn is likely. Then every bushel above that value decreases Dec futures by 10 cents (i.e. 180 national yield would mean Dec corn at $3.50).

Beans are still caught up in tariff issues while weather continues to be uncertain. There is a lot of risk in both directions right now.

 

Market action: Previous trade results

Three of my trades expired last Friday. As you can see below, the three trades provided me with relatively low risk potential opportunities to get added premium in a non-profitable, sideways market on some of my corn. In the end, one of the three trades added 9 cents of added premium to my ongoing “pot of premium” on 10% of my production and the other two were essentially a wash. While I wish I could have received a bit more added premium, I definitely prefer considering alternative trading solutions that allow me the opportunity to get some added premium over waiting and hoping this market turns around because I don’t know when it will.

 

Following shows all the details and results.

Trade 1: Sold call

On 6/18/18 when Sep corn was near $3.65 I sold the following call:

  • Sold an Aug $3.80 call for 9 cents that expires July 27 on 5% of my ’17 production
  • If corn is trading below the strike price when this option expires I keep the 9-cent premium and add it to another trade later.
  • If corn is trading above the strike price when this option expires I have to sell corn for the strike price PLUS I keep the premium. This means a price of $3.89 on Sep futures.

 

My trade thoughts and rationale on 6/18/18

Since I still need to sell some of my remaining ’17 corn but I don’t want to sell $3.65 Sep futures, this trade allows me to get values close to $4 if we rally some. If the market stays sideways, I keep the 9-cent premiums. There isn’t a downside protection with these trades, but that isn’t the goal for this trade.

 

Final results

Corn closed below $3.80, so I keep the 9-cent premium to add to my pot of premium I’ve been collecting all year.

 

Trade 2: Sold straddle

On 6/13/18 when Sep corn was around $3.85, I sold an Aug $4 straddle (selling both a put and call) and bought a $3.70 Aug put, collecting 30 cents total on 10% of my 2017 production.

What does this mean?

  • If Sep corn is $4 on 7/27/18, I keep all of the 30 cents
  • Every penny corn is below $4 I get less premium until $3.70. With the $3.70 put I won’t lose anything on the trade, but I don’t have any grain protected to the downside or sold.
  • For every penny higher than $4 I get less premium until $4.30
  • At $4.30 or higher I have to make a corn sale at $4 against Sep futures, but I still get to keep the 30 cents, so it’s like selling $4.30.

 

My trade thoughts and rationale on 6/13/18

This trade is most profitable in a sideways market. With the current good weather forecasts, I’d be happy collecting the premium to add to another opportunity later. However, if the market drops significantly I’m also protected from losing money or having to buy corn back with this trade. With what I know today, if the market rallies I’ll be very happy with a $4.30 sold price. I’m comfortable with any market outcome of this trade.

 

Final results

The market closed below $3.70 so I made and lost nothing on this trade except commissions for placing the trade.

 

Trade 3: Sold straddle

On 6/18/18, 5 days after trade 2, and after a 20-cent drop in corn with Sep futures around $3.65, I sold an Aug $3.70 straddle (sold both the put and the call) and collected 29 cents total on 10% of my production

 

What does this mean?

  • If Sep corn is at $3.70 at expiration on 7/27/18 I keep all of the 29 cents
  • For every penny corn is below $3.70, I get less premium until $3.41. At this point, I either have to buy back futures (i.e. remove a sale) or take a penny loss for every penny under $3.41 on the trade.
  • For every penny higher than $3.70 I get less premium until $3.99.
  • At $3.99 or higher I have to sell my corn for $3.70 against Sep futures, but I still keep the 29 cents, so it’s like selling $3.99

 

My trade thoughts and rationale On 6/18/18

Like Trade 2, this trade is most profitable in a sideways market. But unlike Trade 2, there are no puts in place to protect my downside. I think a 20-30 cent range is likely. Since I’m behind in my sales and I want the market to rally, I would be fine potentially losing a little on the upside potential. Regardless, this trade only represents 10% of my ’17 production, so I’m comfortable with any outcome.

 

Final results

On 7/18/18, when Sep corn was trading at $3.47, I bought back the put portion of the straddle for 25 cents. 13 of the last 15 years corn prices decreased from mid-July to the end of July, so I thought there was a good chance prices would fall below $3.41, and I would then have to take a loss on the trade. Instead, after commissions and buying back the call for 25 cents that I had originally sold for 29 cents I profited about 3 cent in the end. Those profits managed to cover the commissions in the previous trade and is why these two trades ended up being a wash.

 

Market action: New trades I just placed and rationale

As stated above, when the market is down and many signs indicate continued sideways activity, rather than doing nothing and waiting, I prefer to consistently seek alternative trading solutions in that provide relatively lower risk opportunities that could add premium to my grain marketing. That being said, on all trades I do I know all potential outcomes for any market scenario (up, down and sideways) and I’m willing to accept all three, or I don’t place the trade.

Following details some recent trades including all the details and rationale.

 

New Trade 1: Sold straddle

On 7/18/18 when Sep corn was around $3.48, I sold an Sep $3.45 straddle (selling both a put and call) and bought a $3.30 Sep put, collecting 15 cents total on 10% of my 2017 production.

 

What does this mean?

  • If Sep corn is $3.45 on 8/24/18 I keep all of the 15 cents
  • For every penny corn is below $3.45 I get less premium until $3.30. With the $3.30 put I won’t lose anything on the trade, but I don’t have any grain protected to the downside or sold.
  • For every penny higher than $3.45 I get less premium until $3.60
  • At $3.60 or higher I have to make a corn sale at $3.45 against Sep futures, but I still get to keep the 15 cents, so it’s like selling $3.60

 

My trade thoughts and rationale on 7/18/18

This trade is most profitable in a sideways market. With the current good weather forecasts, I’d be happy collecting the premium to add to another opportunity later. However, if the market drops significantly I’m also protected from losing money or having to buy corn back with this trade. With what I know today, I would prefer that the market would rally and I’ll be very happy with a $3.60 sold price because I have a lot of different trades already working that need prices to be above $3.60. I’m comfortable with any market outcome with this trade.

 

New Trade 2: Sold call

On 7/19/18 when Sep corn was near $3.51 I sold the following call:

  • Sold an Sep $3.50 call for 10 cents that expires Aug 24 on 10% of my ’17 production
  • If corn is trading below the strike price when this option expires I keep the 10-cent premium and add it to another trade later.
  • If corn is trading above the strike price when this option expires I have to sell corn for the strike price PLUS I keep the premium. This means a price of $3.60 on Sep futures.

 

My trade thoughts and rationale on 7/19/18

Since I still needed to sell some of my remaining ’17 corn, but I don’t want to sell $3.50 Sep futures, this trade allows me to get a slightly higher value. If the market stays sideways, I keep the 10-cent premiums. There isn’t a downside protection with these trades but that wasn’t what I was trying to accomplish with this trade either.

 

My overall ’17 crop position

There is 45% of my ’17 crop is still unpriced. With the new trades above and others already in place that 45% is covered with different option strategies making my final position vary depending on the Sep futures price on 8/24.

 

If Sep futures are:

  • Below $3.30 nothing is sold but I collect about 10 cents on 25% of production
  • At $3.40 I collect 10 cents on 35% of production but no additional sales are made
  • At $3.50 I collect 10 cents on 35% of production but no additional sales are made
  • $3.60 I will sell 20% of my production for $3.60 and collect 10 cents on 15% of production
  • At $3.70 I will sell 20% of my production for $3.60 and collect 10 cents on 25% of production
  • At $3.80 I will sell 30% of my production for $3.78 and collect 20 cents on 15% of production
  • At $4.00+ I will have the right to finish my ’17 production sales for a $3.95 average price

With Sep futures prices around the $3.65 level and the USDA crop report on Aug. 10, I have a plan that is ready for a range of prices. Like all farmers I hope prices rally, because I would like to finish up sales on the ’17 crop before Sept. 1.

 

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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