By Jon Scheve, Superior Feed Ingredients, LLC
The market is in “holiday mode” with light trading, the weather in Brazil and Argentina is being monitored closely. Any dry conditions could further reduce corn and bean yields over the next few weeks.
On Oct. 3 when corn was trading at $6.85, I suspected corn prices would likely be range bound or slightly higher after harvest was finished. Therefore, I placed a trade to maximize some profit potential if that happened. On 10% of my 2022 production, I sold a $6.85 January straddle (i.e., sold both the $6.85 January put and the $6.85 January call which are based upon March futures). This allowed me to collect a net positive value of 68 cents.
What does this mean?
If the value of March corn on Dec. 23 is:
- Above $7.53 — I must sell futures at $6.85 but keep all the 68 cents collected on the trade, so it would be like selling $7.53 futures.
- Below $6.17 — I give back all of the 68 cents initially collected from the trade and I start to lose on this trade penny for penny below this value.
- Between $6.17 and $7.53 — I keep some of the 68-cent profit I collected to place the trade. The closer the price is to $6.85, the more I keep.
Why did you make this trade?
I was comfortable with all potential outcomes.
- Prices go up — I would have been happy selling 10% of my crop above $7.50.
- Prices go down — Based on early yield reports, it seemed unlikely corn would trade to the lower end of the range, and because it was only on 10% of production downside risk seemed limited.
- Prices stay sideways — I would collect additional profits, which historically seemed the most likely scenario.
On Dec. 23, when corn was $6.67 and the options were about to expire, I bought back the $6.85 put for just under 20 cents because I did not want it to execute and give me a long position in my hedge account. I did not buy the call back because it was very likely that it would expire worthless at the end of the day because the market was well under the $6.85 strike price as well as saving me commission on that portion of the trade. After all commissions, I made about a 48-cent profit on the trade (i.e., the 68 cents originally collected less the 20-cent cost to buy back the put), which I can apply to my final prices.
This is the second straddle I collected over a 45-cent profit on in the last month on 10% of my production. While these examples illustrate how selling straddles in sideways markets can be a great way to increase profits, they need to be done carefully. Farmers need to fully understand and be willing to accept all potential final outcomes if prices go up, down or sideways before placing these type of trades.
Please email firstname.lastname@example.org 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.