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Marketing results of December options

By Jon Scheve, Superior Feed Ingredients, LLC

As corn harvest finishes in many areas, and free harvest storage time is up, farmers need to decide if they will price grain now or pay for storage and wait for a rally. Given this week’s price dip, it seems some may have already “thrown in the towel” and priced some corn in commercial storage.

On a positive note, some end users across the Corn Belt increased corn basis bids 10 to 15 cents from last week. There are also some reports of free DP (deferred pricing) being offered in areas where corn harvest is finished, and farmers aren’t motivated to sell at these lower prices.

Bean futures are struggling with no China trade deal. However, since farmers aren’t selling, basis continues to climb. My local processor increased their basis bid another 5 cents this week. That makes it a 25-cent improvement in 25 days, while my local elevator is up only 7 cents in the same time period.

 

Market action
Three of my December options trades expired Friday. The following details the trades and the final results.

 

Trade 1 — Sold Straddle

On 9/5/19 when Dec corn was trading $3.59, I 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.
  • At $3.42 or lower I begin to lose money penny for penny regardless of how low prices go and no sale is made.
  • 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.

 

My trade thoughts and rationale 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 10% of my production at $3.98, which is 39 cents higher than today. I think its unlikely prices will be below $3.42 at the end of November, but I am prepared for this scenario too.

 

What happened?

Since placing this trade, the market ranged between $3.52-$4.02 and is currently at $3.68. On Friday when prices hit $3.69, I bought the put portion of the straddle back for 1 cent and let the call expire worthless. After commissions, I have a 25-cent net profit on 10% of my production.

 

Trade 2 — Sold straddle

On 10/16/19 when Dec corn was trading $3.90, I sold a December $3.85 straddle and bought a $3.70 put on 10% of my 2019 production collecting 16 cents.

 

What does this mean?

  • If Dec corn is $3.85 on 11/22/19, I could keep all 16 cents
  • For every penny corn is below $3.85 I get less premium penny for penny until $3.70.
  • At $3.70 or lower I don’t lose money on this trade (other than a total of a ½ cent after all commissions), because buying the $3.70 put eliminates any downside loss on the trade.
  • For every penny higher than $3.85 I get less premium penny for penny until $4.01
  • At $4.01 or higher, I have to make a corn sale at $3.85 against Dec futures, but I still keep the 16 cents, so it’s like selling $4.01

 

My trade thoughts and rationale for this trade on 10/16/19

Export pace seemed to slow when the December futures topped $4. Also, with the slow harvest progress, I think its unlikely corn will trade below $3.70 by the end of November. So, I think the market is probably range bound between $3.70 to $4 through November.

 

What happened?

I had hoped farmers would have their corn locked up in storage by now so prices wouldn’t have dropped below $3.70. However, harvest pace was slower than expected, and a lot of corn is hitting the market right now. I didn’t make anything on this trade, but I didn’t lose much either.

 

Trade 3 — Bought calls

On 5/28/19 December corn was $4.37, and it seemed likely there would be record widespread planting delays and significant prevent plant acres. Through other trades I already had in place, if the market rallied, 50% of my crop would be sold at $4. However, I wanted to participate if the market continued to go much higher. So, I purchased a $6 December call for 6 cents on about 25% of my anticipated 2019 production.

I’m usually against buying calls because the market has to rally substantially to offset/justify the price of the call and the market carry. However, the market was experiencing something never seen before, which meant I needed to consider alternative grain marketing strategies and solutions. I knew I wanted to take advantage of a potential rally, but I didn’t want to “put all my eggs in one basket.” To minimize potential loss from buying a call, and having the market never rally further, I selected a higher price point ($6) and lower call cost (6 cents).

Buying these calls was basically an insurance policy if the extreme happened and the market rallied significantly higher.

 

What happened?

The calls expired worthless. The cost of the calls, were about 1.5 cents across all of my 2019 production, which were completely offset by my profits from trade 1.

 

Looking forward

I have a positive outlook over the next couple of months for both corn and beans. Both markets seem to be approaching a bottom, and U.S. prices are competitive globally. Maybe corn and bean futures can get a little bounce between the holidays.

 

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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