By Jon Scheve, Superior Feed Ingredients, LLC
The corn market is facing a lot of bearish news right now:
- Remaining concerns of African Swine Fever, and a little bird flu
- Corn movement as farmers need to generate some income
- Potentially 94 million corn acres being planted this year
- Lack of China purchases from a phase 1 trade deal
- A potentially large South American corn crop
- Weak ethanol margins
- A strong dollar which leads to a slower export pace.
Despite so much negative news, the market continues to perform well with corn futures only down 15 cents since the coronavirus hit. Spreads between March and May futures have narrowed from around 8 cents last month to just under 4 cents. Considering the carryout size reported by the USDA, this seems overly tight. These tight spreads combined with the strong basis levels could indicate that corn futures may have more upside than downside potential going forward.
Following details, the rationale and outcomes of two straddle trades I did recently.
March Straddle Trade #1
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 are around $4.10. While I’m disappointed corn dropped 10 cents from its 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.
March Straddle Trade #2
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. This has contributed to corn trading tightly between $3.85 and $3.90 over the last month and half. Since March corn futures only closed below $3.76 four times in the last four months, and it’s been three months since it closed above $4.04, I think corn will continue a tight trading range through February and into March.
I did this straddle trade because I think a sideways market will most likely continue through March and I want to pick up added premium if that happens. However, I’m still concerned the market could decline due to the coronavirus, but I’m prepared if that happens. If the market rallies, I would be thrilled because I have more ’19 and ’20 corn to sell.
What were the results of both trades?
On 2/21/20 when the market was $3.765, I bought back both sets of puts for 13.5 cents and let the calls in each straddle trade expire worthless. On the first trade I kept 16 cents of profits after commissions. On the second trade I captured a half cent of profit, but after commissions I’m down just under 1 cent on that trade.
These outcomes are basically consolation prizes because I didn’t want to sell corn below $4 on March futures, let alone $3.90. I walk away with 15 cents of profit on 10% of my production while I continue to wait for better prices.
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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