How I Am Capturing Additional Profits In A Sideways Market

Published on: 09:17AM Jan 28, 2020
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Market Commentary for 1/24/20

US 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 6th 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
  • Every penny corn is below $3.85 I get less of the premium penny for penny until $3.65
  • $3.65 or lower I lose money penny for penny on this trade.
  • Every penny higher than $3.85 I get less of the premium penny for penny until $4.05
  • $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
  • Every penny corn is below $3.90 I get less of the premium penny for penny until $3.76
  • $3.76 or lower I lose money penny for penny on this trade.
  • Every penny higher than $3.90 I get less of the premium penny for penny until $4.04
  • $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

•            Every penny corn is below $3.90 I get less of the premium penny for penny until $3.59

•            $3.59 or lower I lose money penny for penny on this trade.

•            Every penny higher than $3.90 I get less of the premium penny for penny until $4.21

•            $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 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 Expirations on February 21st

With the profits from the 1st trade, and the potential profits from the 2straddles 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 make 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.

Want to read more by Jon Scheve?  Check out recent articles:

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How I Captured Market Carry On My Corn

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Is It Possible For Beans To Trade Above $9.50 & Corn To Trade Above $4

The December Corn Basis - Is It A Good Level To Sell?

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Re-Owning Corn Futures Or Options - The Pros And Cons Of Both

 

Jon Scheve
Superior Feed Ingredients, LLC
[email protected]
 
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