Sep 17, 2014
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The Ted Spread

RSS By: Ted Seifried, AgWeb.com

Ted is the Chief Market Strategist and Vice President in charge of the Zaner Ag Hedge Group and specializes in agricultural hedging employing various strategies using futures, futures spreads, outright options and option combinations. He believes it is paramount to be able to use different strategies to adapt to market conditions. Ted works with large to mid size grain and livestock producers and end users in North, Central and South America.

How do I Sell Soybeans without Stepping in Front of a Freight Train?

Aug 22, 2013

TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.        

Corn, wheat and soybeans were sharply lower as rains fell on some of the dry areas in Iowa, Minnesota, Nebraska, Illinois and Wisconsin.  Additionally the mid-day weather forecast showed hints of more rains in the 2 week forecast for other dry areas that missed out on the rains of the last 24 hours.  

The rains were not a surprise event, but confidence had been low that the much needed rain would actually materialize.  So, as precip started to show up on radar screens yesterday afternoon and into the evening selling pressure mounted.  Soybeans made an attempt to rally back to unchanged early in the pit session on the idea that rains were not enough, but as the system held up through the day and soybeans ended with the lowest close of the week.  Is the party over for soybeans?  I can not say for sure as there certainly are more dry areas that need rain and frost is still a concern, but today's events really put a damper on the bullish market mentality.  

Spreads were active today as strong basis kept September contracts supported relative to deferred months.  One of the most interesting developments of the day for me was the movement in the November 2013 - November 2014 soybean spread.  November 2013 soybeans were down 17 1/4 cents today while November 2014 were only down 1/4.  This is a gain of 17 cent to November 2014 and it is a big one day move.  This would typically be considered bear spreading and could be hinting toward a change in market sentiment.  Most importantly, it seems that some of the bigger funds have been dealing a lot in spreads in recent history and could suggest that some of the bigger market players are getting bearish up here.  

This November 2013 - November 2014 soybean spread is something I have been following and recommending to my clients wanting to make sales after this fast and furious rally.  I believe it is a good way to manage a short position in soybeans right now.  From a hedge perspective you do give up some downside potential by being long the November 2014 but you also potentially reduce some risk and margin requirements are currently about 40% of a straight futures position.  The thing is, in my opinion you do not give up too much in the way of downside potential to out weigh the benefits vs being straight short November 2013 soybeans.   

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When soybeans were down on lows the November 2013 contract held a 10 cent premium to November 2014.  Currently the November 2013 soybeans hold over a $1.02  premium over the November 2014 even after the 17 cent move today.  This would suggest that the spread could benefit by 92 cents on a move back to lows.  Right now November 2013 soybeans are a little over $1.20 off the recent lows and November 2014 soybeans are 30 cents off the low.  So it is possible that if soybeans go back to lows and both November 2013 and 2014 are hitting lows at the same time that spread could gain close to $1.00 while being short a November 2013 futures contract would gain $1.20 - $1.30. Given that margin on the spread is about 40% of a straight futures contract and that the risk could be less on the spread it would seem that the spread could be a good option.  

It also could be possible at some point for November 2014 soybeans to hold a premium over November 2013.  This would be a normal carry market which soybeans have not seen for a while due to tight ending stocks.  If ending stocks end up at a more normal level this year and especially if the US begins to increase imports of South American soybeans a normal carry market could be justified making the spread even more attractive at current levels.  

Now, it is important to understand that as always with futures trading there is significant risk involved.  This spread could go to $3.00 or more if there is a major crop failure like there was last year (i.e Major frost damage).  So do keep that in mind.  This spread is designed to take some risk off being short November 2013 soybeans by being long November 2014 but it may not.  Also, margin on this position is much less then a straight futures position which theoretically means you can do almost 3 of the spreads compared to 1 straight future which certainly adds more risk as well.  

Selling November 2013 soybeans has become much more attractive after the sharp rally in the last two weeks but can be very risky.  The November 2013 - 2014 spread is interesting and offers some nice potential benefits over being straight short futures.  Give me a call if you would like to hear more about it.  

CME Options On Futures: The Basics: http://www.zaner.com/offers/?page=9&ap=tseifrie

Feel free to give me a call or shoot me an email if you would like to talk about your marketing plan, the markets, weather, or just to visit.   

December Corn Daily chart:

November Soybeans Daily chart:

December Wheat Daily chart:

All this means that speculators should be looking for opportunities and producers need to look to lock up some prices while we have corn near $5.00 and soybeans near $12.00. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.

In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!

Ted Seifried (312) 277-0113 or tseifried@zaner.com

Please check out my Blog at: http://tedseifriedfutures.com/

Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?ap=tseifrie

Futures, options and forex trading is speculative in nature and involves substantial risk of loss.  This commentary should be conveyed as a solicitation for entry into derivitives transactions.  All known news and events have already been factored into the price of the underlying commodities discussed.  The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.

FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION'S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE'S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION.

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