By Jon Scheve, Superior Feed Ingredients, LLC
In 19 of the last 20 trading sessions, corn closed within a tight range of $3.83 to $3.98. It seems farmers are willing to make sales at $4 and end users are willing to buy at or below $3.80. I expect sideways trading until the November USDA report.
In early September when December corn futures were trading below $3.60, $4 seemed unlikely. So, I looked for trades with upside potential near $4, even if the market didn’t go there.
Trade 1: Sold Straddle
On 9/5/19 when December corn was around $3.59, I sold a November $3.65 straddle (selling both a put and call) on 10% of my 2019 production collecting 21 cents.
What does this mean?
- If Dec corn is $3.65 on 10/25/19, I could keep all 21 cents
- For every penny corn is below $3.65 I get less premium penny for penny until $3.44
- For every penny higher than $3.65 I get less premium penny for penny until $3.86
- At $3.86 or higher I have to make a corn sale at $3.65 against Dec futures, but I still keep the 21 cents, so it’s like selling $3.86
- At $3.44 or lower I begin to lose money penny for penny regardless of how low prices go and no sale is made.
Trade 2 – Sold Straddle
On 9/5/19 I also sold a December $3.70 straddle on 10% of my 2019 production collecting 28 cents.
What does this mean?
- If Dec corn is $3.70 on 11/22/19, I could keep all 28 cents
- For every penny corn is below $3.70 I get less premium penny for penny until $3.42
- For every penny higher than $3.70 I get less premium penny for penny until $3.98
- At $3.98 or higher I have to make a corn sale at $3.70 against Dec futures, but I still keep the 28 cents, so it’s like selling $3.98
- At $3.42 or lower I begin to lose money penny for penny regardless of how low prices go and no sale is made.
My trade thoughts and rationale for both straddles on 9/5/19
I’m concerned the market will continue to trade sideways. Since straddles are most profitable when the market doesn’t move significantly in either direction, the premium collected on these trades could help push a final sale to profitable levels eventually. If the market rallies, I’m comfortable selling 20% of my production at an average price of $3.92, which is 33 cents higher than today. I think its unlikely prices will be below $3.42 at the end of October or even at the end of November, but I am prepared for this scenario too.
The market rallied over the last 7 weeks since I placed this trade. It has traded between $3.52 and $4.02 and is currently at $3.87. With the November straddle trade, I have now sold 10% of my production at $3.86, or basically current market prices. If corn is above $3.70 in late November when the December straddle expires, another 10% of my production will be sold and a combined 20% of my production will be priced at $3.92 futures.
I’m fine with the outcomes of these trades so far. My biggest risk in early September was the market declining further. Historically September is when the market tends to find a low and by late October it tends to work its way back up slightly through the end of the year. Last year the market stayed range-bound around $3.70 for 6 months. These straddles allowed me to generate premium if there was a repeat of last year. I also was rewarded for the rally off the lows with a value that is only 10 cents off the recent highs. Like everyone else though, I hoped futures would rally because I have more corn to sell. I still have at least 30% more of the ’19 corn to price and 80% of the 2020 crop.
Please email firstname.lastname@example.org 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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