How a range-bound market left me with sales above the current market value

By Jon Scheve, Superior Feed Ingredients, LLC

There is a big focus right now on Argentina’s weather and crop development. Half of their corn was planted early and damaged by the recent dry weather. The other half was planted in the last month and has been followed by some rain this past week, which has helped crop growth. Moving forward, Argentina’s weather in February will dictate price direction on futures until Brazil’s second corn crop takes center stage in April and May.

Earlier this month a large bank issued a statement suggesting commodities (i.e., energy, metals, currency, livestock, and grains) were a good buy for this upcoming year. It seems that since early January a lot of money has been pushed into the market. This may be a big reason why the grain markets have been rallying so much so quickly.

Market action

As I shared previously, I have been making straddle trades to help increase my price on some of my 2021 corn. In early August I placed 2 trades each on 10% of the 2021 production and collected 50 cents from the trade that expired in late October and 17 cents from the trade that expired in late November. 

Since these previous trades were profitable, and I wasn’t forced to make a sale on either, I replaced both with new straddle trades. Following details those results. 

January straddle 

On Oct. 15 when March corn was trading at $5.30, I sold a $5.30 January straddle (where I sell both the $5.30 put and the $5.30 call) and collected 38 cents of premium. I placed this trade on 10% of my 2021 production. The options on this trade would expire 12/23/21.

What does this mean?

  1. If March corn is above $5.68 on 12/23/21 I would let this option execute, giving me a short futures position of $5.30. With the 38 cents I collected, the sale would essentially be like selling $5.68.
  2. If March corn is below $4.92 on 12/23/21 no futures sale is made, and I would lose penny for penny for whatever value March corn is below $4.92.
  3. If March corn is between $4.92 and $5.68 on 12/23/21 no sale is made, but I would get to keep some of the 38 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 12/23/21 March corn was trading at $6.05, so as planned I let the call option execute as a sale at $5.30. With the 38 cents collected upfront, my final sale was $5.68.

February straddle 

On Nov. 18 when March corn was trading at $5.85, I sold a $5.85 February straddle (where I sell both the $5.85 put and the $5.85 call) and collected over 46 cents. I placed this trade on 10% of my 2021 production. The options on this trade would expire 1/21/22.

What does this mean?

  1. If March corn is above $6.31 on 1/21/22 I would let this option execute, giving me a short futures position of $5.85. With the 46 cents I collected, the final sale would essentially be like selling $6.31.
  2. If March corn is below $5.39 on 1/21/22 no sale is made and I would lose penny for penny whatever the difference between the value of March corn is below $5.39.
  3. If March corn is between $5.39 and $6.31 on 1/21/22 no sale is made but, I would get to keep some of the 46 cents of profit from selling the straddle that I could add to a later trade. The closer the market is to $5.85 on that day, the more profit I keep because I will either have to buy back the $5.85 call or $5.85 put before options expiration.

What happened?

On 1/21/22 March corn was trading at $6.15, so I bought back the $5.85 call for 30 cents and let the put options expire worthless. This left me with a 15-cent profit (over 46 cents collected – 30 cents to buy back the call – about 1 cent in commission).

Final thoughts on these trades

Collectively, I’m pleased with the combined results of these four straddle trades. I suspected the market could trade sideways from August through January, and I managed to collect additional premium without much added risk. In the end I only had to sell 10% of my production with never more than 20% of production at risk of being sold at values that I was satisfied with. And while I did sell 10% of my corn at $5.30, the collected premium from the four straddle trades combined during that period totaled $1.20 (50 cents, 17 cents, 38 cents and 15 cents). Therefore, in the end my sale was actually $6.50 on 10% of my production.

Now that both trades are off my hedge position, I can make more similar trades again if I wish. 

With this trade I’m left with only 50% of my 2021 corn futures position sold.

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

2021 straddles

By Jon Scheve, Superior Feed Ingredients, LLC Last week the markets dropped due to concerns …

Leave a Reply

Your email address will not be published.