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Selling straddles

By Jon Scheve, Superior Feed Ingredients, LLC

The biggest news of last week was when Agriculture Secretary Perdue announced that China agreed to buy 10 million metric tons (about 400 million bushels) of beans Friday afternoon from the Oval office after the markets closed. Earlier in the week President Trump said China would also buy more corn too. While both statements seem positive, the market has already heard rumors and predictions before, only to be let down by smaller numbers due to a variety of reasons. It will take follow through and actual purchases to get the market excited.

March corn closed again for the 13th straight Friday within the tight trading range of $3.74 to $3.85.

 

Market action

With corn trading within a very tight range the last 3 months, including straddle trades in my grain marketing plan was a good decision for my farm operation. Since late November, I placed three straddle trades that all expired on Friday that helped me generate 13.5 cents of profit on 30% of my corn production. Details of each trade are shown below.

 

Straddle trade 1

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.

 

My trade thoughts and rationale when placing the trade on 11/19/18

This trade is most profitable in a sideways market, which I think is the most likely scenario right now. March futures have not exceeded $3.95 since Mid-August, so I would be happy if prices rallied and I was forced to make a sale above $4. Historically the market doesn’t trade lower in late February than the previous November, so I think a big price drop is really unlikely. If the market stays sideways, I collect more money than doing nothing, or even making a sale today.

 

What happened?

With futures around $3.77 on Friday, I bought back the put portion of the straddle for 4 cents after commissions. The call option expired worthless, so I made a net profit of 19 cents on this trade that I will add to a later sale.

 

Straddle trade 2

On 12/17/18 when March corn was around $3.85, I sold a March $3.80 straddle (selling both a put and call) and collected just over 19 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 19 cents
  • For every penny corn is below $3.80 I get less premium penny for penny until $3.61.
  • For every penny higher than $3.80 I get less premium penny for penny until $3.99
  • At $3.99 or higher I have to make a corn sale at $3.80 against March futures, but I still get to keep the 19 cents, so it’s like selling $3.99
  • At $3.61 or lower I have to take a loss on this trade penny for penny below $3.61.

 

My Trade Thoughts and rationale when placing the trade on 12/17/18

This trade is most profitable in a sideways market, which I think is the most likely scenario right now. If corn rallies, I’ll be happy selling for $3.99. On the flip side, I think downside risk is minimal. End users recently have been buyers below $3.75. Usually once harvest is over and grain is stored, there is a modest price recovery in the first part of the year.

 

What happened?

Similar to the trade above, I bought back the put on Friday for 4 cents, leaving me with a 15-cent profit that I’ll add to a later trade. Again, I’m ahead using this trade strategy over almost any other trading scenario during this time period.

 

Saddle trade 3 

On 1/25/19 when March corn was around $3.79, I sold a March $3.80 straddle (selling both a put and call) and collected just over 12 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 12 cents
  • For every penny corn is below $3.80 I get less premium penny for penny until $3.68.
  • For every penny higher than $3.80 I get less premium penny for penny until $3.92
  • At $3.92 or higher I have to make a corn sale at $3.80 against March futures, but I still get to keep the 12 cents, so it’s like selling $3.92
  • At $3.68 or lower I have to take a loss on this trade penny for penny below $3.68.

 

My trade thoughts and rationale when placing the trade on 1/25/19

This trade is again most profitable in a sideways market. If the market is range-bound another 4 weeks, I’ll profit similar to the trades above. If the market rallies, I’d be happy to sell at $3.92. The market has rarely dipped below $3.70 in the last 3 months, so I think a significantly price drop is unlikely before the options expire. If the market continues the $3.75-$3.85 range for closes on a Friday, I’ll make at least 7 cents on this trade.

 

What happened?

Just like the 2 trades above I bought the puts back for 4 cents and was left with an 8-cent profit I can add to a later trade. This trade too turned out to be the most profitable scenario I could have made in the last 30 days for my position.

 

Final thoughts

Like all farmers, I wish that corn would rally significantly, so I could sell my corn at higher, more-profitable levels. But I don’t know when that’s going to happen again, and I can’t just sit around waiting and hoping. I have corn to sell. In the meantime, I’m happy collecting this added premium detailed above, so that I can try and manufacture profitable prices for my corn. During this long-term sideways market, it brings me peace of mind having trades in place that generate profit, if the market goes nowhere, while I wait for some significant market movement.

 

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.

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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