2021 straddles

By Jon Scheve, Superior Feed Ingredients, LLC

Last week the markets dropped due to concerns over the new COVID variant throughout the world. Wheat, beans, crude oil, and the stock market opened lower and didn’t rebound throughout Friday’s trading session. On the other hand, corn, oats, and spring wheat started lower but rebounded higher during the shortened trading day.
Until more is known about the new strain’s effects, how it spreads, and if current vaccines offer protection, market direction is unknown.


Market action

In early August after watching the market swing between $6 and $5 throughout July, I was uncertain of market direction from August through November. I thought if corn was at or above $6 once harvest was over, it would be a good price to start selling more of my 2021 crop. However, at that time it seemed like a sideways corn market through November was the most likely outcome.
Therefore, on 8/2/21 when December corn was trading $5.45, and before the August USDA yield estimate was released, I made the following 2 straddle trades. 

November straddle 

On 10% of my anticipated 2021 production, I sold a $5.30 November straddle (where I sell both the $5.30 put and the $5.30 call) and bought a $4.70 put and collected 62 cents or premium. The options on this trade would expire 10/22/21.

What does this mean?

If Dec corn was above $5.92 on 10/22/21, I would let this option execute, giving me a short futures position of $5.30. With the 62 cents I collected, the final sale would essentially be like selling $5.92. If Dec corn was below $4.70 on 10/22/21, no sale is made but I would make 2 cents on the trade, because the $4.70 put purchased with the straddle offsets the short put position I would get executed on from selling the $5.30 straddle. Basically, the 2 cents of profit from the trade would offset my commissions and I would have no profit or loss on the trade. If Dec corn was between $4.70 and $5.92 on 10/22/21, no sale is made but I would get to keep some of the 62 cents of profit from selling the straddle that I could add to a later trade. The closer the market is to $5.30 on that day, the more profit I keep because I will either have to buy back the $5.30 call or $5.30 put before options expiration.


What happened?

On 10/22/21 Dec corn was trading $5.38, so I bought back the $5.30 call back for 8 cents, and let the other options expire worthless. This left a 50-cent net profit on the trade (62 cents collected – 8 cents to buy back the call – 2 cents commission).

December straddle 

When I sold the November straddle above, I also sold a $5.30 Dec straddle (where I sell both the $5.30 put and the $5.30 call) and bought a $4.60 put, collecting another 72 cents. This was also on another 10% of my anticipated 2021 production. The options on this trade would expire 11/26/21. 

What does this mean?

If Dec corn was above $6.02 on 11/26/21 I would let this option execute, giving me a short futures position of $5.30. With the 72 cents I collected, the final sale would essentially be like selling $6.02. If Dec corn is below $4.60 on 11/26/21, no sale is made but I would make 2 cents on the trade, because the $4.60 put purchased with the straddle offsets the short put position I would get executed on from selling the $5.30 straddle. Basically, the 2 cents offsets my commissions and I have no profit or loss on the trade. If Dec corn is between $4.60 and $6.02 on 11/26/21, no sale is made but I would get to keep some of the 72 cents of profit from selling the straddle that I could add to a later trade. The closer the market is to $5.30 on that day, the more profit I keep because I will either have to buy back the $5.30 call or $5.30 put before options expiration.


What happened? 

On 11/26/21 Dec corn was trading $5.83, so I bought back the $5.30 call for 53 cents and let the other options expire worthless. This left me with a 17-cent profit (72 cents collected – 53 cents to buy back the call – 2 cents commission).


Final thoughts on these trades

I’m pleased with the results of these trades for several reasons. One, I managed to collect additional premium while the market stayed in a sideways pattern, which historically happens most often during late harvest. Two, since I was unsure of market direction, I protected myself against multiple unknown events by having puts to the downside on these trades. And finally, it could have allowed me to sell near the top of the recent price range should the market have rallied as harvest was ending.
Now that both trades are off my hedge position, I’m free to make more of the same types of trades again if I wish. I will add these additional profits to an upcoming trade or a sale that I will eventually make on this crop in the future.

Please email jon@superiorfeed.com with any questions or to learn more. 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.

Check Also

Top 10 web stories of 2021

By Matt Reese There were plenty of surprises in 2021 in general, and some surprises …

Leave a Reply

Your email address will not be published. Required fields are marked *