Selling calls can set up success

The Fed didn’t change interest rates last week, which helps farmers in the short-term. The dollar won’t increase in value, making it easier to export grain. Also borrowing money for operation costs won’t likely increase.

The corn market is under pressure, likely from the start of harvest. Yield results are wide-ranging, causing price volatility. Some in the industry are looking for yields to come in less than expected and help push futures back above $4. Pending how low yields could go will ultimately be the final driver of futures prices.

Some end users are concerned farmers won’t sell after harvest, which could keep prices from going lower. They are looking for dips in the market to make purchases.

Market action

The following provides detail/rationale from a recent trade on my farm operation. Providing general grain marketing strategy “best practices” is good, but I think describing real life trade examples is a great way to show farmers the benefits of having a sophisticated marketing strategy. It also illustrates marketing opportunities farmers may never think about, or know existed.

I sold a $4.20 March ‘16 call for $.18 last week, representing about 5% of my 2015 corn crop.

I sold a $4.40 May ‘16 call for $.19 last week, representing about 5% of my 2015 corn crop.

I sold a $4.80 Dec ‘16 call for $.18 last week, representing about 5% of my 2016 corn crop.

Why – Based upon market conditions at this time, I am estimating that corn will have trouble getting to those price levels without a major yield correction. However, if I’m wrong and corn does rally, I am willing to sell at those prices of $4.20, $4.40 and $4.80 while keeping the $.18 or $.19 each.

What happens if March corn is above or below $4.20 on Feb 19^th, the day the option expires?

– If corn is below $4.20 – I keep the $.18. Then I try doing this again on another call in the future. I don’t have downside protection.

– If corn is above $4.20 – I have to sell March corn futures for $4.20. But, I get to keep the $.18 from the sale of the call. Plus, since I have all of my 2015 crop sold, I will roll this to 2016 for a potential increase in value (currently about 8 cents) in the market today. This would mean $4.48 for next year’s corn crop ($4.20 + $.18 for the call and $.08 cents for the premium to roll to Dec futures).

What happens if May corn is above or below $4.40 on April 22^rd, the day the option expires?

– If corn is below $4.40 – I keep the $.19. Then I try doing this again on another call in the future. I don’t have downside protection.

– If corn is above $4.40 – I have to sell May corn futures for $4.40. But, I get to keep the $.19 from the sale of the call. Plus, since I have all of my 2015 crop sold, I will roll this to 2016 for a potential increase in value (currently about 4 cents) in the market today. This would mean $4.63 for next year’s corn crop ($4.40 + $.19 for the call and $.04 cents for the premium to roll to Dec futures).

What happens if Dec corn is above or below $4.80 on Nov 25^th, the day the option expires?

– If corn is below $4.80 – I keep the $.18. Then I try doing this again on another call in the future. I don’t have downside protection.

– If corn is above $4.80 – I have to sell Dec corn futures for $4.80. But, I get to keep the $.19 from the sale of the call. This would mean $4.98 for next year’s corn crop ($4.80 + $.18 for the call).

I’m pleased with these trade considering where the market is today. The March call expires after the January USDA report when yield results are provided. The May option expires during planting, when prices tend to be weak. The Dec options expire after a another growing year (and another year of unknowns).

In other words, if the market…..

• Goes sideways – I will be ahead
• Goes down – I will be ahead
• Goes up – I made a premium over an outright sale at these levels

While the biggest potential benefits of this trade are based upon the estimation that prices will move sideways, this example illustrates how risk is downplayed in my marketing strategy by considering if prices move up or down. I understand and accept the prices I will receive either way. It also shows how it’s possible to build small premiums into trades when the markets aren’t moving, if you plan far enough ahead.

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.