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Stagnant market sets stage for straddles

By Jon Scheve, Superior Feed Ingredients, LLC

U.S. corn prices are currently competitive globally; however, the market is watching to see how the coronavirus impacts the world economy. Despite positive movement on Thursday, March corn reversed on Friday and finished between $3.85 to $3.90 for the sixth straight week.

Market action

Following details three straddle trades I’ve done recently.

 

February straddle trade:

On 11/20/19 when March corn was trading $3.80, I sold a February $3.85 straddle (selling both a $3.85 put and a $3.85 call) on 10% of my 2019 production and collecting 20 cents total of premium.

 

What does this mean?

  • If March corn is $3.85 on 1/24/20, I could keep nearly all of the 20 cents.
  • For very penny corn is below $3.85 I get less of the premium penny for penny until $3.65
  • At $3.65 or lower I lose money penny for penny on this trade.
  • For every penny higher than $3.85 I get less of the premium penny for penny until $4.05
  • At $4.05 or higher I have to make a corn sale at $3.85 against March futures, but I still keep the 20 cents, so it’s like selling $4.05 March futures.

 

My trade thoughts and rationale on 11/20/19

After watching corn prices drop from $4.10 to $3.77, it seemed like corn should start finding some support around $3.75. Now that harvest is finished and grain bins are locked, I look for prices to be range bound between $3.70 to $4.10 through January. Therefore, I want to place a trade that captures profits if we are in that price range.

 

What happened?

As the options expiration approached on Friday, and the market was trading at $3.89, I bought back the call portion of the straddle for 4 cents and let the put options expire worthless. This left me with a 15-cent profit on the trade, but no additional futures sale was made.

 

March straddle trade:

On 1/22/20 when March corn was trading $3.90, I sold a $3.90 straddle (selling both a $3.90 put and a $3.90 call) on 10% of my 2019 production collecting just over 14 cents of premium total.

 

What does this mean?

  • If March corn is $3.90 on 2/21/20, I could keep up to all of the 14 cents.
  • For every penny corn is below $3.90 I get less of the premium penny for penny until $3.76.
  • At $3.76 or lower I lose money penny for penny on this trade.
  • For every penny higher than $3.90 I get less of the premium penny for penny until $4.04.
  • At $4.04 or higher I have to make a corn sale at $3.90 against March futures, but I still keep the 14 cents, so it’s like selling $4.04.

 

My trade thoughts and rationale on 1/22/20

As I expected, farmers mostly kept grain bins locked the past two months. With the February straddle mentioned above about to expire I knew I would have some profit from that trade that I could add to the outcome of this new March straddle I was placing. Corn has continued to trade between $3.85 and $3.90 over the last month and half and I look for corn to stay in that tight trading range through the end of February. In the last 4 months, March corn futures only closed below $3.76 4 times, and it’s been 3 months since it closed above $4.04.

My biggest concern is if the market declines due to the coronavirus over the next month. A big rally would be welcome because I have more corn to sell for both the 2019 crop as well as the 2020.

 

March straddle trade already in place:

On 10/16/19 when March corn was trading $4.00, I sold a $3.90 straddle (selling both a $3.90 put and a $3.90 call) on 10% of my 2019 production collecting just over 31 cents of total premium.

What does this mean?

  • If March corn is $3.90 on 2/21/20, I could keep nearly all of the 31 cents
  • For every penny corn is below $3.90 I get less of the premium penny for penny until $3.59.
  • At $3.59 or lower I lose money penny for penny on this trade.
  • For every penny higher than $3.90 I get less of the premium penny for penny until $4.21.
  • At $4.21 or higher I have to make a corn sale at $3.90 against March futures, but I still keep the 31 cents, so it’s like selling $4.21.

 

My trade thoughts and rationale on 10/16/19

Export pace seems to slow when March futures were around $4.10. While I’m disappointed corn dropped 10 cents from it’s high 2 days ago, I think selling this straddle will allow me to reach that level again or even higher. Once harvest is finished and grain bins are locked, I expect corn to be range bound between $3.70 to $4.10 through February. Since I think it’s unlikely the market will decrease significantly over the next few months, this straddle trade allows me to capture profits during a sideways market.

 

Looking forward: March options expiration on Feb. 21

With the profits from the first trade and the potential profits from the two straddles currently in place, I could capture a value equal to $4.20 March futures on 20% of my 2019 production if corn is at or above $3.90 futures. If March corn is between $3.60 and $3.90, I may not have a sale in place, but I’ll at least have made additional premium that I can add to another sale in the future. My risk in this trade would be if the coronavirus or some other unforeseen event causes corn to drop below $3.60.

 

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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