Home / Market Analysis / Selling calls and straddles to try and create opportunity
Photo by Joan Leffel.

Selling calls and straddles to try and create opportunity

By Jon Scheve, Superior Feed Ingredients, LLC

Nothing concrete happened during the Trump Xi meeting, so the market continues to trade sideways. Since June 15 the March ’19 corn board never closed above $4 and has only closed below $3.60 three times. Past performance is certainly not a guarantee, but it would seem possible that this range could continue for several more months.

Right now I only have about 46% of my ’18 corn production priced on futures, so I need to develop a plan to get the rest priced. With corn prices below profitable levels for the foreseeable future, I want to manufacture trades that can help me maximize my profit potential as much as possible, while still minimizing my risk exposure. That’s why I recently did several trades that take advantage of the current sideways market to help me get some extra premium. For me this is a better strategy than waiting around hoping for a rally, because I’m not sure when or if that’s going to happen, and I have corn that needs to be sold.

Here is a summary of the trades I placed over the last month and half. For full trade detail and my rationale for making each trade see the section “Trade Details and Rationale” at the bottom.

Sold corn call — On 10/2/18 when March corn was near $3.80, I sold a January $3.80 call for 10 cents expiring 12/21/18 on 10% of my ’18 production.

Sold straddle 1 — On 10/2/18 when March corn was around $3.77, I sold a January $3.75 straddle (selling both a put and call) and collected just over 23 cents total on 10% of my 2018 production.

Sold straddle 2 — On 11/19/18 when March corn was around $3.75, I sold a February $3.70 straddle (selling both a put and call) and collected just over 18 cents total on 10% of my 2018 production.

Sold straddle 3 — On 11/19/18 when March corn was around $3.75, I sold a March $3.80 straddle (selling both a put and call) and collected just over 23 cents total on 10% of my 2018 production.

 

The importance of planning for any possible market scenario

These trades are most profitable in a sideways market, which seems like the most probable outcome right now with what I know today. However, I still make sure I never place a trade unless I’m comfortable with every possible market scenario happening (i.e. up, down or sideways). The following summarizes how I’ll be affected with these trades collectively for any possible market outcome.

 

Market rallies — If March futures would average out being above $3.94 each time the options expire I will have an additional 40% of my production sold for a maximum price of $3.94 against March futures. However this hasn’t happened since mid-August, and with what I know today, I’d be happy with that price and outcome. If all of these options would get hit and I would have another 40% of production priced, it will give me an average price of $4.10 sold against March futures, when I include my other grain marketing strategies I already have in place.

Market goes down — Historically it’s not often that March futures decrease through the winter. Still I need to be prepared for everything. Overall, I could lose 11 cents on about 10% of my production if prices fell to $3.50 and I would be down 41 cents on 10%of production if prices are at $3.40 each time the options expire. While this seems unlikely to happen at this point, I will still be watching the market closely and will place protections on these trades quickly to minimize any losses should the market look to head significantly lower. In the event that the market does go down during this time I would not have any additional sales made.

Market stays sideways — If March futures are at $3.60 or $3.90 I don’t have to make any sales, but I’ll collect around 29 cents of additional premium on 10% of my production. But, I could collect about 60 cents of premium on 10% of production if the average futures price level is between $3.70 and $3.80 each time the options expire. Either way as long as I’m in the range of $3.60 to $3.90 I will be adding whatever premium I collect to later trades that will hopefully bump me up to profitable levels.

These trades allow me to make more money during a sideways market than doing nothing. I have to be comfortable with any market scenario happening, but now I’m less worried about the “when and if” of the next market rally. For me, focusing on a strategic plan for my grain marketing, rather than just hoping for a rally to sell, helps me sleep easier at night.

Trade details and rationale

Sold corn call

On 10/2/18 when March corn was near $3.80, I sold a January $3.80 call for 10 cents – expiring 12/21/18 on 10% of my ’18 production.

What does that mean?

  • If corn is trading below the strike price when this option expires I keep the 10-cent premium and add it to another trade later.
  • If corn is trading above the strike price when this option expires I have to sell corn for the strike price PLUS I keep the premium. This means a price of $3.90 on March futures.

On 10/2/18 I still needed to sell some of my remaining ’18 corn, but I didn’t want to sell $3.80 March futures. This trade allowed me to get higher values than are available today. If the market stays sideways, I keep the 10 cent premiums and can make this type of trade again to add even more premium. There isn’t downside protection with this trade, but that isn’t the goal for this trade.

Sold straddle Trade 1

On 10/2/18 when March corn was around $3.77, I sold a January $3.75 straddle (selling both a put and call) and collected just over 23 cents total on 10% of my 2018 production.

What does this mean?

  • If March corn is $3.75 on 12/21/18, I keep all of the 23 cents
  • For every penny corn is below $3.75 I get less premium penny for penny until $3.52.
  • For every penny higher than $3.75 I get less premium penny for penny until $3.98
  • At $3.98 or higher I have to make a corn sale at $3.75 against March futures, but I still get to keep the 23 cents, so it’s like selling $3.98.
  • At $3.52 or lower I have to take a loss on this trade penny for penny below $3.52.

This trade is most profitable in a sideways market, which I think is the most likely scenario right now. If the market does nothing through 12/21/18, I’ll profit similar to the trade above. With what I know today (10/2/18), I’ll be happy to sell corn for $3.98. I’m a little concerned with the downside risk right now but, it’s the middle of harvest and historically once harvest is over, and grain is stored, there is usually a modest price recovery.

 

Sold straddle trade 2

On 11/19/18 when March corn was around $3.75, I sold a February $3.70 straddle (selling both a put and call) and collected just over 18 cents total on 10% of my 2018 production.

What does this mean?

  • If March corn is $3.70 on 1/25/19, I keep all of the 18 cents
  • For every penny corn is below $3.70 I get less premium penny for penny until $3.52.
  • For every penny higher than $3.70 I get less premium penny for penny until $3.88
  • At $3.88 or higher I have to make a corn sale at $3.70 against March futures, but I still get to keep the 18 cents, so it’s like selling $3.88.
  • At $3.52 or lower I have to take a loss on this trade penny for penny below $3.52.

This trade is again most profitable in a sideways market, which I think is the most likely scenario. If the market is range-bound though the end of January, I’ll profit similar to the trades above. With what I know today I’ll be happy to sell corn for $3.88. With harvest nearly complete I’m less worried about downside risk, plus there is usually a modest price recovery in December.

 

Sold straddle trade 3

On 11/19/18 when March corn was around $3.75, I sold a March $3.80 straddle (selling both a put and call) and collected just over 23 cents total on 10% of my 2018 production.

What does this mean?

  • If March corn is $3.80 on 2/22/19, I keep all of the 23 cents
  • For every penny corn is below $3.80 I get less premium penny for penny until $3.57.
  • For every penny higher than $3.80 I get less premium penny for penny until $4.03
  • At $4.03 or higher I have to make a corn sale at $3.80 against March futures, but I still get to keep the 23 cents, so it’s like selling $4.03.
  • At $3.57 or lower I have to take a loss on this trade penny for penny below $3.57.

This trade once again is most profitable in a sideways market. If the market continues to be range bound through February, I’ll profit similar to the trades above. Knowing what I know today, I’d be happy selling for $4, especially since it’s higher than the previous two straddles. I’m more concerned with the downside risk at this point than being forced to make a sale above $4.

 

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. He can be contacted at jon@superiorfeed.com.

Check Also

Corn neutral, soybeans bearish in today’s USDA numbers

By Doug Tenney, Leist Mercantile Today’s USDA report had corn production at 13.661 billion bushels, …

Leave a Reply

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