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Hedging Corn and Soybeans

RSS By: Howard Tyllas, AgWeb.com

Howard Tyllas is currently a member of the Chicago Board of Trade and registered with the Commodity Futures Trading Commission as a floor broker and as a Commodity Trading Advisor.

March Corn Daily Numbers & Trade I deas for 1 /12/12

Jan 12, 2012

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This report was sent to subscribers on 1/11/12 3:50 p.m.Chicago time to be used for trading on 1/12/12.

March Corn

After the close recap on 1/12/12: My pivot acted as resistance and was 4.185, .012 from the actual high, and my support was 4.109, .021 from the actual low.

March Corn

Use the same numbers as used on 1/ 10 & 11 /12
6.68 XX is the 200 DMA
6.63
-----------6.53 Pivot
6.42 ¾
6.35 ¼
6.24 ¾ to (6.19 ½ FG)
5 day chart.... Down from last week same day
Daily chart ...... Down
Weekly chart .......Down
Monthly chart .... Sideways 6.68 is the 200 DMA
ATR 13 ½ Balanced 56%

 

 

For 1/12/12: I continue to say "Gap from year end is support, and the daily numbers resist".

In my daily corn numbers on Wednesday; my resistance was .02 from the actual high; my support was .03 ¼ from the actual low.
1/12/12:

Grains: Spot on corn numbers and soybean resistance, soybean support was accurate. Long term subscribers can now sing the song of "I do not care what makes a market move to a support or resistance; I make money trading chart levels and numbers, not fundamentals especially when they are unknown". They have seen for themselves many times such as a bullish report causes the market to open sharply higher, and closes lower for the day. Many bullish reports in 2011 where followed within 4 days by draw downs that were $.95 or more. Nothing changed fundamentally in the 3:45 minutes of open outcry, or on the days that followed. They have seen how they really made money, by having a strategy, be able to execute what adds income, and not make bets based on fundamentals. They know how to use their "perception" of the fundamentals, and that is to use those thoughts (and guesses) for a "bias" only.

My guess for tomorrow would be no big deal or a little bearish numbers, and either should cause us to go down until we find real buyers. If it is bullish, I would sell any rally at resistance, and I would roll up whatever we could with puts and calls to lock in more. Unless it is really bullish, the fundamentals I consider bearish, and I am more confident selling rallies, than buying breaks. We still want them to rally and have to send in money to the hedge account, but we can more than live with them coming down. I just do not want our put spreads to run out. I will be looking at the report at 7:30 and I will send out my thoughts before 9am. I know that this huge report is exciting for most around us, but with our position it seems quite boring.... PERFECT!

Lastly, options today will see the winner will not win, and the loser will get killed. My producers are fortunate that we are at a high enough level that even if we get a bearish report, they have enough protection to withstand a limit down move in both soybeans and corn.

I want to trade the numbers, especially at an extreme number, and risk $.05 in corn and $.06 in soybeans using a stop to protect any idea.

1/11/12:

Grains: Spot on soybean numbers and accurate corn numbers. Spreading and position adjusting was the feature on Tuesday, and I expect more of the same today. All eyes will be on this report.

Average trade estimate for 2011 corn yield is 146.163 BPA and production of 12.265 BB, soybeans 41.358 BPA and production of 3.048 BB. Final quarter stocks are pegged at 9.391 BB of corn, and 2.324 BB of soybeans. And the number that means the most to old crop as well as old crop/new crop spreads is the projected ending stocks (carryout) for 2011/2012 of 749 MB of corn and 233 MB of soybeans.  

Monday MLK holiday allows the floor to be closed, but will trade Sunday night through Monday morning electronically. This means we will have report day and Friday to "absorb" the news and adjust positions before the 3 day weekend. I know my producers are well positioned for the downside, and will need to adjust if we go higher in order to capture more gains and allow for more upside. Everyone has the chance tomorrow to buy more downside coverage if felt needed if you are bearish, and you could roll some of your short calls or spreads if you are bullish. Nobody is stopping you from doing whatever you want to do; only you can do that. Write in your journal tonight and execute your plan tomorrow, even if it means to do nothing. NO "old ladies at the racetrack" are allowed in the real world of trading. Anyone who was a trader on the floor for years would never be able to "cry" like that to another trader, we would look at it like you dropped the winning touchdown catch in the end zone, and the ball hit you in the chest. No excuses allowed in the real world. Reasons maybe (and it is usually you), excuses never.  

"The horses are nearing the starting gate" and the windows are still open to place your wager on if corn and soybeans will rally or break. Allocating an exact "bet" is easy to do by buying known risk option strategies, and they also provide the exact "odds" when you make the wager. My producers do this throughout the year and I have stressed my "Goldie Locks" mentality on occasions like this report, to not do too much or too little, but asset allocation that is just right for them on this "one idea". Unless you have a conviction, I would do the least amount to satisfy yourself so you do not act like the racetrack lady. If the market rallies strongly or breaks hard and it would not bother you if it does because you have no idea what the market would do, then do nothing, THAT IS A POSITION.

I prefer to be strong and take what the market will give me, and I am more concerned with how the market reacts to the news than the news itself. You know I have always said no matter the market, I want to have a sell bias when at resistance levels, so if I did want to take a "longshot" bet, it would be a known risk option strategy and I would be short. I want to continue to day trade the numbers without bias and risk $.05 in corn and $.06 in soybeans using a stop to protect any idea. 

1/10/12:

Grains: Spot on grain numbers! March soybeans rallied back to resistance levels at November highs, and $12.35 held it back in the morning, as well as a retest late in the day. March corn did the same, but backed off early and never really regained its footing. Long time subscribers know I never think the market will be at an extreme price going into a MAJOR report, and that is why I like to day trade from the short side when at resistance levels before this report. Soybeans really went nowhere only breaking $.07 from its high once it was made, but corn broke $.12 once its high was made. Soybeans closed very well, but are having trouble at the same price it did today at $12.35. I have said for weeks, if corn got to $6.67 for whatever reason, I would be an aggressive seller.

Options premium still has a lot of premium kept in them for now, after the report the "steam" should be taken out of them. The Feb $6.50 calls settled at $.23 1/8 up $.01 7/8. If today was the last day, it would expire worth only $.02 ($.02 above $6.50). My producers have short $6.50 calls for the most part, and if they want to get bullish they only need to trade $.25 upside for waiting another month before expiration. Buy the Feb $6.50 call and sell the March $6.75 call, and pay only $.00 ¼ for the roll. So if you got $.08 ¼ for the Feb $6.50 call, you would still retain $.08 of it, and now you have your bin until $6.75, you traded for another possible $.25 in income without risking anything. Corn would need to expire above $6.83 before my strategy stops making money for you. (Of course you can continue to roll up or into the next month if the market continues to rally)  

Soybean Feb $12 calls settled with an extra $.20 in premium at $.52 ¾ but you can roll to the March $12.30 call and it would cost only $.04 1/8, because it settled at $.48 5/8. You keep all but $.04 of what you collected from selling the Feb $12 call, and now you can make $.30 more if above $12.30 on expiration or if you roll up the put spread now or later (cheaper if we rally, more expensive if it goes down) to lock in more than what you have locked in now.

The good thing for my producers is that if the market was testing support right now, we would be forced into buying more protection even though just above support, because with the threat from this report to open sharply higher or lower, being unprotected and not just paying a few cents more if the support fails, would make us pay the extra $.20+ for another $.50 protection. Being at resistance and being protected for $.50 down from here, is really in our favor not being forced into playing "D-Fence".

You know I have been trading with a bearish bias but not so much on Monday, but would continue to day trade the numbers without bias and risk $.05 in corn and $.06 in soybeans using a stop to protect any idea.

1/9/12:

Grains: Spot on numbers, and the soybean support was the exact low of the day. Bullish news (SA production perceptions) but closed lower on the week is not good news for the bulls. Depending on weather forecasts, the market should hold the gap left from 2011 year end at least going into the report on Thursday. Anyone who says they know where prices will end this week or even if it will just close up or down, should get a job as a comedian.

Before the report March corn chart looks to trade $6.59 ¾ (the high on Friday) on the high side, and the gap at $6.19 ½ on the low end, and the pivot would be $6.39 ½ (the low on Friday). December corn is just $.06 away from filling the gap that would make it unchanged on the year. At this time the threat of a huge 2012 crop has put a cap on the "new crop", you could see clearly it was the weakest link on the board. Any $.10 or $.15 rally before the report should be sold. I would not buy December 2012 corn, if I wanted to buy corn it would be the old crop March contract. There is little to no chance for the new crop to outperform the old crop if corn was going to rally. For now I prefer to do a Texas hedge, by selling both old and new.    

Soybean weather is not in a critical stage yet in SA, its weather game will be coming after the Jan report has come and gone. Old and new crop should more or less move in tandem for now unless the report surprises. March soybean chart is like the March corn chart, with Friday's high of $12.19 ¾ as resistance, and the gap from 2011 at $11.72 ½, with the pivot at $11.96.

Charts provided numbers to work with, and my producers for the most part have captured most of what the rally has given them, and the main concern always is if they have enough protection. The chart offers strong clues to what is needed, and each producer (or trader) must follow their own ideas of what is needed, and what is to be risked. If the market rallies, they will be more than ready to roll out of their Feb calls into the March calls, and roll up their puts at least enough to capture some more income in case the market comes back down before expiration, and even more if it continues up. My producers have the luxury knowing the protection they have slows down any major surprise, and will watch premium come into their accounts if the market does not produce more than a $.50 move. They all took the weight of the "gamble" and the stress that comes with it, and replaced it with a strategy that they can control the amount risked as they seek further gains. Anything less than a $.30 move for the week would be a non event.

You know I have been trading with a bearish bias but not so much on Monday, but would continue to day trade the numbers without bias and risk $.05 in corn and $.06 in soybeans using a stop to protect any idea.


1/6/12: Grains: Spot on grain numbers! Soybeans "filled the gap" and corn closed below the gap from Friday's close. Did it rain, or did all those pictures from SA already get all the action it can get for now? (Where are all the pictures of the fields that have a "bumper crop" growing?) I gave all the reasons I said I did not think we could sustain these levels, especially before next Thursday's USDA report. It is such a high risk report that it is far from likely that we will be at an extreme end of a support or resistance level going into it. Take a look at the charts and you will see that 2 Friday's ago (12/23/11) the gap for corn and soybeans is in the middle of the high posted this week, and the lows of December. Those gaps are pivotal to me for a longer term trade, as well as price discovery in the current time frame. Those gaps below are not just support (as always) but are pivotal too on the current charts.  

I think we will be closing near those gaps on the day before the report, which means soybeans would have $.70 and corn $.45 up or down from the pivot (the gap prices) to retest their support or resistance numbers. That is also a limit move in soybeans and $.05 more than limit for corn. 

My producers could care less that the grains broke on Thursday, they already have moved most or all their old crop (and some of the new) up to $6.40 march corn put spreads, and $12 soybean puts. It does not matter if we go down now; they have at least the first $.50 down from here. Before the roll up of their put spreads from let's say $6, they would not have made $.01 if the market would go down to $6 on expiration. Now the market could stay here, go down, or even better if it continues higher, it does not matter. Now we wait for either the market to come down to the gap support, or maybe by Wednesday for the premium to be worthwhile to roll to the March calls from the Feb.

I am not worried if we rally, my concern is the same as always, if you have enough protection if we go down. I want protection down to the low of December, anything less than that protection is your "gamble" that can save about $.04 for every $.10 protection below the current $.50 March corn put spreads, or $.80 March soybean put spreads.

Corn put spread "roll up" in December 2012 corn only moved 1/8 cent, from $5.50/$5 to a $5.80/$5.30 spread. To move to a $5.90/$5.40 put spread settled at $.06 1/8. Since the low of November and December "double bottomed" at $5.35, I need put spread coverage down to $5.30 or $5.40 for that reason. Since nobody knows for sure if we can get a report and weather this spring that could send us to retest the all time highs, or a report and weather that will not present an opportunity to "lock in" $5.90 for a long time, allocating some money to "lock in" higher prices on some of your crop seems like the prudent thing to do. This is just one example of the MANY times to reflect what YOU THINK into your hedge when you "morph" (or do not).

I have only 1 producer left who wanted to buy "his corn" back as I recently wrote. I told him I have no problem if he wants to speculate on the "long side" and allocate funds with a known risk strategy, but I have a problem when one "masks" a gamble with anything called a "hedge". To hedge, is to take risk off the table, never by putting risk on. It is easy for me to be strong enough to keep "reality" always in play, even when it means giving up thousands in commissions, not only once with this person, but twice in the last couple of months. I know I saved him $9,000 the first time, and he would be even at best on this one at this time, but win or lose I would make money. He knows that everything is his decision not mine and it does not matter if the trade idea works or not, what is the most important thing to me is to instill respect for the market, and change the way my producers "gamble". To gamble the same size as you produce ("your entire crop") seems to be a large wager. I insist on knowing what your risk is, and dividing that into how many contracts can you do with that money risked. If I wanted to risk $5,000 and each contract costs $.10 or $500, I can do 10 contracts. If I need to risk $1,000 to be proven wrong, then I can only do 5 contracts. I do this for a day trade, or a long term trade, I allocate money. All trades are not equal, either is what I want to "wager" on every trade idea. Some trades are worth taking, and some have "all the stars" lined up and I am licking my chops to bite into the trade. By learning "how to trade" and with much practice you find your account making money and growing, you can start to increase your account size. After a few years of success you might just feel there is a chance you can do this profitably in the long run. If that happens, the commissions generated much more money for me than what is lost promoting the "wrong mindset". This is a mental game, and control is a foundation.

I give all my producers an A+ on their report cards for the first time. Most of them have the perfect mindset, and have executed their plan to "lock in" profits and get 60 to 80% of what the market gave them, then to gamble that prices will be sustained or go higher. I did not think we could rally here, and I have a few producers a lot more bearish than me, and it tickles them pink that they could make money being WRONG, I really like that too. The people that were kind of "shootem up cowboy's" and needed action when we first met, are now much happier to have much less "action" but have much more money. 

I would trade today with a bearish bias, and would continue to day trade the numbers without bias and risk $.05 in corn and $.06 in soybeans using a stop to protect any idea.

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