Double call strategy sale

Brazil’s weather has been good recently, some are expecting a record crop.  If this happens, the U.S. export program may slow when the Brazil bean harvest starts in 45 days which could lead to a ceiling on prices.

Several weeks ago I mentioned that Nov ’17 bean prices compared to Dec ’17 corn prices are incentivizing farmers to plant more beans in 2017. I’ve noticed recently that some in the trades are now pointing this out as well.  It will soon be debated if beans are correctly priced, with corn being substantially underpriced. Or, are corn values priced appropriately with beans overvalued?

In the meantime, beans are one of the few crops showing profits for 2017. I expect this will drive farmers to increase bean acres next year.

Market Action

Last week I discussed the importance of tracking the goals and strategies for every trade farmers do.  Then when the market moves significantly later, I can objectively determine the merits of each trade, which helps me in future trades and marketing strategy. On Friday 11/23 my Dec contracts expired, following are the remaining trade details.

Double Call Strategy Sale .

  • History — on 8/22/16 I had collected a 20 cent premium on calls I previously sold that expired with no sale (15% production). I wanted to continue to collect premium in the event of a sideways market so I placed the following trade:
  • Trade Details — on 8/22/16 Dec corn was $3.42.  I did the following:
    • Sold 2- $3.30 Oct Call – expires 4th Fri of Sep for 31 cents total (15.5 cents each x 2)
    • Sold 2- $3.40 Nov Call – expires 4th Fri of Oct for 27 cents (13.5 cents each x 2)
    • Sold 2- $3.40 Dec Call – expires 4th Fri of Nov for 31 cents (15.5 cents each x 2)
    • Note: these 3 calls are based upon Dec futures at the time of expiration
  • % Production: 15% (5% each)
  • Goal — I expect prices to trade sideways through harvest and I want to take advantage of this
  • Potential Benefit — collect additional 30-cent average premium if the market trades sideways or falls without selling anything.  I can combine this with the 20 cents already collect in Aug for a 50 cent total premium.
  • Potential Concerns
    • If the market is above the strike price, I have to sell double my intentions at each strike price, or 10% of my production at $3.30, $3.40 and again at $3.40.
    • Since I’m behind on 2016 sales (usually I’m 90% sold by Aug and this year I’m 70%) I can justify these price points when I include the premiums.
  • Result
    • The trades didn’t work as I expected. Ultimately it turned out ok, but it got complicated.

 

Trade Detail Summary for the Double Call Strategy

  • Nov Call
    • On Nov 11, when the market fell back to $3.40 I purchased back the futures I had previously sold in the Nov call.
    • No Sale
    • 27 Cent premium to apply to previous trades
  • Oct Call
    • The $3.30 price is still in place.  I had hoped the market would fall back to $3.30, which would allow me to buy it back, but it never happened.  10% of my production sold
    • 15.5 cent premium collected and added to $3.30 sale
    • Total price against Dec futures – $3.455
  • Dec Call
    • The $3.40 price is still in place. 10% of my production sold
    • 15.5 cent premium collected and added to $3.40 sale
  • Rolled Position 
    • Because sales above are in the Dec they need to be moved forward to collect market carry
    • On 11/30/16 I bought the dec futures and sold March futures at 10 cents premium
    • I chose March because I will have to core my bins in the next few months
    • These sales are now at a total price against March futures – $3.555 & $3.6555 respectively

Final thoughts —  I am now 90% sold on my 2016 corn crop. The last two trades are not the greatest, but they are certainly ahead of where the market is today. Still, I think there is room for premium on those last two trades. I placed another trade on the Tuesday before Thanksgiving.

Selling Straddles

  • #1 Trade Detail — I sold a $3.60 Feb straddle
  • What does this mean?
    • I sold a $3.60 put and a $3.60 call against March futures for 23 cents.
    • This trade expires on Jan 27th and will be based upon where Mar futures are that day
    • If Corn is $3.60 — I keep 23 cents
    • For every penny away from $3.60 the market is, I lose a penny of the total premium collected
      • Ex. $3.70 or $3.50 — I lose 10 cents from the 23 collected so I still collect 13 cents
    • Corn is <$3.37 — I have to repurchase corn at $3.37 with no premium collected
    • Corn is $3.83+ — I have to sell more corn at $3.83 with no premium collected
  • Goal — I think corn will be within 10 cents of $3.60 but as long as it’s between $3.37 and $3.83 in late Jan ‘17 I get to take some profit.
  • Potential Benefit — Collect premium without selling anything that can be added to previous sales
  • Potential Concern 
    • I’m fine with having to buy corn at $3.37, because in the double call trades above I had to sell $3.40 anyway but really never intended to. I would still get the profit already collected in the trade above of 22 cents. However, it could mean I would be 80% sold vs 90%.
    • Selling corn at $3.83 in Mar currently seems like a great sale.  If this happens, I would roll it to Dec ’17 and collect the 25 cent market carry. That would mean starting 2017 sales at $4.05, which looks good with what we know today.
  • Bottom Line — this is a sideways trade play. Worse case, I sell some corn for $4.05 for 2017 and I would still have the disappointing 3.30 +.155 +10 = 3.555 against the Mar sold.  Which is above where the market is today.
  • #2 Trade Detail — Same trade as above except:
    • Strike price $3.70 for 30 cents and expiration is 2/24 but still against March futures
    • Repurchase price — $3.40 and additional sale of grain — $4
    • Potential for 25 cent market carry if additional sale is triggered = $4.25 for 2017
    • Between $3.40-$4 — I add to my $3.655 sale above
    • Goal — I’m looking for corn to be within 10 cents of $3.70 in late Feb and I will make another 20 cent premium to be added to a previous trade.
    • This is another sideways trade strategy

Ultimate Strategy

These trades are extremely confusing and unless you have this position on, you may be lost at this point.  That’s ok.  Even if you don’t fully understand the trades, hopefully you can still understand the strategy of why I’m doing what I’m doing.

The point is to show that I am always working to get my 2016 crop sold. I don’t just sit back and wait for the price I want to sell at, because I’m not sure when or if it will come. There is no guarantee. So, I keep working to better my positions increasing my premiums and profits every little bit.

And the thing is, even if the price I want eventually comes, I still have the 2017 crop to think about. I always have more crop to sell in the future. That’s why I don’t want to miss out on guarantees like market carry which is currently 25 cents from Dec to July for holding my grain in storage. I need every penny to keep my farm operation profitable.

 

Following is a chart that shows my current 2016 position in the bin.

 

POSITION – CORN

2016

Corn Sold with Futures

90%

CBOT Price Average

$3.94

Market Carry

$0.20

Basis on Farm

($.35) est

Options & spread profits

$0.22

Cash Price picked up at Farm

$4.01 est

 

With the current bids for CASH corn picked up at my farm of $2.97 (as of Friday night’s closing markets) I will have no trouble sleeping at night.

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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