Straddle success (barely) in a sideways market

By Jon Scheve, Superior Feed Ingredients, LLC 

The market will be focused on the weather in the Dakotas as we move forward. While the rest of the country will have good weather for planting, it will come down to how many prevent plant acres there are in the northern part of the Corn Belt at the end of May.

Market action

On Jan. 18 when May corn was trading at $6.80, I suspected corn prices would likely be range bound or slightly higher at the end of March. Therefore, I placed a trade to maximize some profit potential if that happened. On 10% of my 2022 production, I sold a $6.80 April straddle (i.e., sold both the $6.80 April put and the $6.80 April call which are based upon May futures) which allowed me to collect a net positive value of over 41 cents.

What does this mean?

If the value of May corn on March 24 was:

• Above $7.21 I sell futures at $6.80, but I keep all of the 41 cents collected on the trade, so it would be like selling $7.21 futures.
• Below $6.39 I give back all of the 41 cents collected from the trade, and I start to lose on this trade penny for penny below this value.
• Between $6.39 and $7.21 I keep some of the 41-cent profit I collected when I placed the trade. The closer the price is to $6.80, the more I keep from the trade. 

Why did you make this trade?

I was comfortable with all potential outcomes. 

• If prices go up, I would be happy selling 10% of my crop at $7.21. 
• If 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 four months. Therefore, the downside risk seemed limited.
• If prices stayed sideways, I would collect additional profits to add to later sales, which seemed the most likely scenario.

What happened?

On March 24, a few hours before the options expired and May corn was trading at $6.42, I bought back the $6.80 puts for nearly 39 cents. There was almost zero chance the calls would be exercised that day, so I left them on, and they expired worthless. After commissions, I collected almost 1 cent of profit on this trade that I could apply to my final prices (i.e., the 41 cents originally collected, less the 39 cents to buy back the put options, and less just over the 1 cent commission).

Bottomline

This is the fifth straddle trade where I collected a profit in the last five months. While I would have liked to collect more profit on it, two weeks prior to the straddle’s expiration the trade was losing more than 30 cents. So, I am happy the market rallied and allowed me to walk away with a tiny profit. With this trade, I have made $1.59 per bushel profit on 10% of my production (or the equivalent of nearly 16 cents on 100% of my production), while the market has remained mostly sideways the past 5 months.

These trade examples illustrate how selling straddles in sideways markets can be a great way to increase profits. However, this example 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.

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.

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