Dry weather and more straddle success

By Jon Scheve, Superior Feed Ingredients, LLC 

Last week I suggested the market needed a spark to rally, and it looks like it could be weather. Widespread dry forecasts this past week led the market to rebound everything it lost the week before and more. If dry weather persists this coming week, futures could rally even more. However, if reports suggest rain, the market will likely pull back. Weather uncertainty is typical this time of year and causes increased market volatility through the summer. 

Market action

On March 21 May corn was trading at $6.38 and July corn was trading at $6.20. With corn coming off a recent 6-month low the week before, it seemed that corn prices would likely trade sideways or slightly higher through late May. Plus, once May futures were off the board, it seemed likely the July contract would go up and trade at similar levels as the May contract was trading. 

Therefore, I placed a trade to maximize some profit potential if the market traded sideways through May. On 10% of my 2022 production, I sold a $6.40 June straddle (i.e., sold both the $6.40 June put and the $6.40 June call based upon July futures) expiring on May 26, which allowed me to collect a net positive value of 51 cents.

What does this mean?

If the value of July corn on May 26 is:

  • Above $6.91 — I will sell futures at $6.40, but I keep all the 51 cents collected on the trade, so it would be like selling $6.91 futures.
  • Below $5.89 — I give back all the 51 cents originally collected, and I start to lose on this trade penny for penny below this value.
  • Between $5.89 and $6.91 — I keep some of the 51-cent profit I collected when I placed the trade. The closer the price is to $6.40, the more I keep from the trade. 

Why did you make this trade?

In mid-March, I was comfortable with all potential outcomes of this trade. 

  • Prices go up — I would be happy selling 10% of my crop at $6.91. 
  • Prices go down — Based on the previous few 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 the past 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?

A few hours before the options expired on May 26 and July corn was trading at $5.95, I bought back the $6.40 June puts for 45 cents. With such little time left, I let the calls expire worthless to save on costs and commissions, because it was unlikely, they would be exercised. 

After commissions, I collected just over 5 cents profit on the trade that I can add to my final prices (i.e., 51 cents originally collected, less 45 cents to buy back the put options and around 1 cent commission).

This is the seventh straddle trade in the last seven months that I collected a profit on. I am happy with the result because one week prior to the saddle’s expiration the trade was losing more than 30 cents. Ultimately, the market rallied, and I walked away with a profit.

With this trade, my straddle trades this year have made $1.95 per bushel profit on 10% of my production (or the equivalent of over 19 cents on 100% of my production).

These trade examples illustrate how selling straddles in sideways markets can be a great way to increase profits. However, last month’s futures drop shows 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.

Do you ever use a stop loss on these types of trades?

Last month I discussed a similar trade and a farmer asked if I place stop losses or if I ever exit early to prevent more loss. He also said he thought I got lucky that the market rallied.

No, I never put stop losses on these trades because I only commit 10% of my production to them. While this does not limit the loss potential in the trade it does mean that I am not putting a large portion of my production at risk. 

He is probably a little right about being lucky last month, and maybe this month too. However, I already had a big profit surplus from similar trades this year that could offset any potential losses I had to take, if my “luck” ran out. 

Interestingly, all my straddle trades this year have been winners. My earlier trades this year made 35 to 48 cents of profit and the last few made 1 to 5 cents. For the year on average, I have made nearly 28 cents profit on each. Historically, straddle trades have been profitable for my farm, because they allow me to make small profits on a small portion of my crop during months that usually trade sideways. I consider them a successful marketing “tool” in my 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.

Check Also

Ohio Ag Weather and Forecast, July 17, 2024

July 17, 2024 -- One more round of unsettled weather will be here today with showers and thunderstorms over 70-80% of the state. However, behind the moisture we dry down and turn quite comfortable for the rest of this weekend...

Leave a Reply

Your email address will not be published. Required fields are marked *