More straddle success in a sideways market

By Jon Scheve, Superior Feed Ingredients, LLC 

The market will be monitoring the colder temperatures this week and how quickly the Dakotas can warm up and dry out for price direction. 

The market is also watching what Russia will do with the Black Sea corridor and Ukraine grain shipments after mid-May. Early last week Eastern European farmers became concerned with how much grain was moving west out of Ukraine, because it was causing big price declines for locally grown grain. The European Union stepped in and found a way to move the grain west without hurting farmers in countries close to Ukraine. The continued uncertainty of how and where Ukraine’s grain will be exported will likely impact U.S. grain prices this summer and the next marketing year.

Old crop corn basis is improving across the U.S. Plus, the May to July corn futures inverse spread suggests end users still need grain for the summer. Upside potential still seems to exist in either the futures market and/or basis values moving forward.

The recent December corn and November bean price drop puts values at levels where farmers are not incentivized to plant in unfavorable conditions. If the northern Corn Belt remains wet and cool through late May, more acres may end up in prevent plant.

Market action

On Feb. 9 when May corn was trading at $6.75, I thought it was likely corn prices would trade sideways to slightly higher through late April. Therefore, I placed a trade to maximize some profit potential if that happened. On 10% of my 2022 production, I sold a $6.90 May straddle (i.e., sold both the $6.90 May put and the $6.90 May call which are based upon May futures), which allowed me to collect a net positive value of 48 cents.

What does this mean?

If the value of May corn on April 21 is:

  • Above $7.38 — I will sell futures at $6.90, but I keep all of the 48 cents collected on the trade, so it would be like selling $7.38 futures.
  • Below $6.42 — I give back all of the 48 cents originally collected, and I start to lose on this trade penny for penny below this value.
  • Between $6.42 and $7.38 — I keep some of the 48-cent profit I collected when I placed the trade. The closer the price is to $6.90, the more I keep from the trade. 

Why did you make this trade?

In early February I was comfortable with all potential outcomes. 

  • Prices go up — I would be happy selling 10% of my crop at $7.38. 
  • Prices go down — Based on the previous several months, it seemed unlikely corn would trade to the lower end of this range. Plus, it was only 10% of my production, and I had already collected profit on this type of trade over the last several months. Therefore, the downside risk seemed limited.
  • Prices stay sideways — I would collect additional profits to add to later sales, which seemed the most likely scenario.

What happened?

On April 18, a few days before the options expired and May corn was trading at $6.82, I bought back the $6.90 puts and calls for a total of 15 cents. With several days of trading left, I did not want to take any chance the calls would be exercised. After commissions, I collected just over 31 cents of profit on this trade that I can apply to my final prices (i.e., the 48 cents originally collected, less the 15 cents to buy back the options, and less almost 2 cent commission to get in and out of the trades).

Bottomline

This is the sixth straddle trade where I collected a profit in the last six months. I am happy with the results, because had I waited longer my profit would have been lower. Plus, one month prior to the saddle’s expiration the trade was losing more than 30 cents. Ultimately, the market rallied, and I walked away with a nice profit.

With this trade, I have made $1.90 per bushel profit on 10% of my production (or the equivalent of nearly 19 cents on 100% of my production), while the market has remained mostly sideways the past 6 months.

These trade examples illustrate how selling straddles in sideways markets can be a great way to increase profits. However, the recent drop in futures a month ago showed why they must 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 types of trades. They are not perfect and certainly do not work every time, but this year they have been a great addition to my trading toolbox.

Please email jon@superiorfeed.com with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, Neb. 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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