Options with options

I noticed big changes along I-80 and I-35 during my drive back to MN from the farm this week.  Nearly all of the beans had been harvested, with most combines picking corn.  I didn’t see any elevators with piles of corn, but in most areas farmers are behind with their harvest.

Fundamentally the trade is bearish, but farmers have built a lot of storage in the past few years.  So, many can “sit tight” on their harvest during drops in the market.  End users, on the other hand, may have to work harder to get farmers to sell.  It is uncertain if this will lead to upside potential in the future.  There are so many questions:

  • Will the market carry disappear?
  • Will basis rally?
  • Will futures rally?
  • Will farmers get $4 cash corn and $10 beans?


Beans continue to surprise the grain trade.  Fundamentally beans should be bearish, but this isn’t the case.  Where will the bean market go now?  There are several factors at work:

  • There was a reduction in open interest (the amount of futures positions on the CBOT) this week, which would signify that shorts (people who have sold) put coverage on and got out of the market.
  • November options expired Friday with many open between $10 and $9.80, which the market worked back to by close.
  • The soybean meal pipeline has been having trouble getting filled with the slow harvest.  There still is pent up demand in the near term. However, the crush margin for the processor is at levels that encourage abundant production.
Perhaps prices will have trouble continuing to rally.  Following are uncertainties that could affect future prices:
  • Going forward what will the farmers do when their free beans storage ends in the next week?
  • What about once the crop insurance price is officially set next Friday?
  • Can the market really justify a corn bean ratio at 2.75 : 1 when traditionally it trades around 2.4:1?
  • The western belt is largely done harvesting beans, but the eastern belt still has a ways to go.  Estimates indicate farmers sold 10% of their crop as prices approached $10 this week.  (South American farmers also moved new crop.) Once the short covering is complete, who will be left to “prop” this market up?
  • What will happen when the Argentina farmer begins to move old crop in preparations for the new crop four months from now?


Corn has also had nice runs recently, but it seems these have been more supported by beans. Fundamentally there is a 2 billion bushel carryout that will need to be addressed at some point in the future. That amount is nearly double the carryout of the ‘13/’14 marketing year.

Options Expirations

On Friday, November options expired.  The CBOT recorded the largest options position in history against the November. I’ve mentioned several of my trades in the past with with November options.  Following provides where my options expired and the results to my position.

  • On 9/4/14 I bought a $10 put and sold a $10.40 call at a cost of $.10 to me.  Since the market closed below $10, I sold my beans (the put) for $10 minus the $.10 cost of buying the put/call spread (or $9.90). The $10.40 call that I sold expired worthless.
  • On 7/10/14 I bought a $10 put for $.16. Again since we are below $10, I sold my beans for $10 minus the $.16 for purchasing the put ($9.84).
  • On 5/22/14 I bought a $12 put for $.38. So, I sold those beans for $11.62

The three options above were used to reduce my risk for the 2015 crop.  I mentioned two weeks ago, I had already “rolled” these anticipated futures positions to the July ’15 futures contract at a $.32 premium.  I plan to roll them to the Nov ’15 contract later in the year.

On 2/19/14 I sold Nov bean futures for $11.44 and bought a $12 call for $.44, because I wanted down-side protection and up-side potential. Then on 6/20/14 I sold the $12 call back for $.75 and bought a $13.00 call for $.30, because I expected beans had reached a near-term peak with the recent rally.  I wanted to take some of the profit. I still had the protections in place to the down-side, but I would get $.45 more. If there was a drought, I still had up-side potential that started at $13. Obviously there was no drought issues and the market fell. The $13 call expired worthless and I netted $11.45 on those beans.

On 8/29/14 I sold a $3.60 Nov corn option (Nov corn options are based on the Dec futures price as of close on Friday) for $.125 that expired today. As corn is below $3.60 I have not sold any corn with this trade and I get to keep the $.125.  I’m happy with the premium and will look to try and repeat this type of trade down the road.

On 10/9/14 I sold a $3.40 Nov corn option for $.115 that expired today.  As corn is above $3.40 I have now sold corn for $3.40 Dec futures but I get to keep the $.115 premium which means it’s like selling $3.515. With the market closing right at that value and with negative bias to the corn board over the next month I feel ok selling corn at this level.  If I add the profits from the corn call above to this trade I actually trade a price higher still of $3.64.

The point in sharing this is to not only provide transparency in my positions, but to illustrate how using options reduces farmers risk while providing up-side opportunity. Also, describing my positions in more detail hopefully reduces the fear of more complicated grain marketing strategies.  Farmers don’t need to be fearful of this type of marketing.

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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