Straddles in a range-bound market

By Jon Scheve, Superior Feed Ingredients, LLC 

The December USDA report is usually one of the least influential reports of the year, and this year was no different. The only change was a corn exports decrease due to limited movement this year so far. 

Corn carryout levels are still similar to the last 2 years, when corn eventually traded above $7.50 after harvest. Seasonally, corn usually starts trending higher after mid-December into January.

Moving forward, weather in the southern third of Brazil and most of Argentina will be monitored closely, because dry conditions could reduce corn and bean yields over the next few weeks.

On Sept. 2, I suspected corn prices could likely be range-bound or slightly lower throughout harvest, so I placed a trade to maximize some profit potential if that scenario happened. On 10% of my 2022 production, I sold a $6.50 December straddle (i.e., sold the $6.50 December put and the $6.50 December call) and bought a December $5.90 put. This allowed me to collect a net positive value of 62 cents.

What does this mean?

If the value of December corn on Nov. 25 is:

  • Above $7.12 — I must sell futures at $6.50 but keep all of the 62 cents collected on the trade, so it would be like selling $7.12 futures.
  • Below $5.90 — I keep 2 cents of profit from the trade as the $5.90 put provides protection from downside loss of selling the $6.50 straddle.
  • Between $5.90 and $7.12 — I keep some of the 62-cent profit I collected to place the trade. Basically, I keep more of the 62 cents the closer December futures are to $6.50.

Why did you make this trade?

This trade seemed like a win-win-win. I would be happy selling a small portion of my crop above $7 and there was no downside risk in the trade of losing money if prices fell significantly. Plus, I could collect additional profits if the market continued to trade in a sideways pattern throughout harvest, which historically happens most of the time.

What was the outcome?

On Nov. 21, with only 3 days left of trading December options and corn at $6.57, I bought back the $6.50 straddle for 15 cents. I didn’t want either side of the options to get exercised, because I thought corn could increase a little by the end of the week since it was near the bottom of a 4-month trading range. After all commissions, I had a 45-cent net profit on the trade which I can apply to my final prices.

Bottomline

Selling straddles in sideways markets can be a great way to increase profits. However, they need to be done carefully. One needs to be fully aware and willing to accept all final outcomes if prices go up, down, or sideways.

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.

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