Selling calls

By Jon Scheve, Superior Feed Ingredients, LLC 

On Friday June 30, the USDA will report on the number of acres planted and how much old crop remains in storage. Combine this with weather forecasts, and the next two weeks may provide the most important indicators of market direction for the rest of the year. 

Even though the information in this USDA report is important and could affect the market, price direction will continue to be most impacted by July weather. 

Market action:  Two sold calls

Sold call 1

Throughout the winter months my straddle strategy worked well and provided some additional profit during a relatively sideways market. However, by mid-April I was concerned prices could drift lower into the end of June. Therefore, on April 19 when July corn was trading $6.40, I placed a trade to maximize profit potential if that happened. On 10% of my 2022 production, I sold a $6.75 July call for 11 cents.

What does this mean?

If the value of July corn on June 23 is:

Above $6.86 I sell futures at $6.75, but I keep all the 11 cents collected on the trade, so it would be like selling $6.86 futures.

Below $6.75 I keep all the 11 cents and I have nothing additional sold.

Between $6.75 and $6.86 I keep some of the 11-cent profit I collected when I placed the trade. The closer the price is to $6.75, the more I keep. 

Why did you make this trade?

In mid-April, I was comfortable with all potential outcomes. 

Prices go up — I would be happy selling 10% of my crop at $6.86. 

Prices go down — I keep additional profit from the trade.

What happened?

On June 23, July corn was trading at $6.30, which was below the $6.75 strike price I sold the call for. Therefore, I let the options expire worthless and kept the 11-cent profit from the trade.

Sold call 2

By mid-May I was unsure if corn prices would continue lower, but I thought it was unlikely corn would trade above $6.50 again for another five weeks. Therefore, on May 15 when July corn was trading at $5.90, I placed a trade to maximize some profit potential if the market was sideways or lower. On 10% of my 2022 production, I sold a $6.10 July call for 11 cents.

What does this mean?

If the value of July corn on June 23 is:

Above $6.21 — I sell futures at $6.10, but I keep all the 11 cents collected on the trade, so it would be like selling $6.21 futures.

Below $6.10 — I keep all the 11 cents and I have nothing additional sold.

Between $6.10 and $6.21 — I keep some of the 11-cent profit I collected when I placed the trade. The closer the price is to $6.10, the more I keep from the trade. 

Why did you make this trade?

In mid-May, I was comfortable with all potential outcomes. 

Prices go up — I would be happy selling 10% of my crop at $6.21. 

Prices go down — I keep the profit from the trade.

What happened?

On June 23, July corn was trading at $6.30, which was above the $6.21 price I outlined in my plans above. Therefore, I let the options execute the sale on the July futures at $6.10. I still get to keep the 11-cent profit from selling the call which means it is like selling $6.21. 

Bottomline

Including these two trades with my previous straddle trades, I have made $2.17 per bushel profit on 10% of my production. Or the equivalent of over 21 cents on 100% of my production, while only selling 10% of my corn for $6.10 during that time. I don’t plan to make any additional option trades (calls or straddles) on my remaining 2022 corn crop.

These trade examples illustrate how selling options can be a great way to increase profits. However, the recent futures volatility over the last several months 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.

Next week I will highlight the USDA’s biggest report of the year and discuss the different carryout scenarios based upon this year’s crop yield potential and what that could do to futures values. Then in the weeks following, I will summarize where I finished my 2022 corn crop sales.

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.