December Options Expired
Friday was a big day for me because Dec options expired on 7 different trades I executed over the last 12 months that contributed largely to my 2017 production’s overall grain marketing plan and strategy. Below I’ve provided all of the trade detail for each one including rationale for why I made the trade at the time, all possible outcomes of each trade based upon what the market could possibly do, how my profitability was ultimately affected, and my final observations and lessons learned.
You’ll notice that there is a lot of detail provided for each trade because, one, I like to be transparent and I find those who fully explain their plan are more credible. Two, in my experience most farmers are unaware of all the options available to them and many want more detail and specifics because they are interested in learning and considering alternative opportunities they may not currently understand or be hearing about. For those wanting just a summary of each trade, you can read the “What Happened” section of each trade for an abridged version.
Trade # - 1 – (15% Production) – Sold Calls, Bought Put and a C.S.O. Put
On 1/23/17 - Dec ’17 when corn futures were $3.95
- Sold 2 – Dec 4.00 calls – collected 29 cents each (or 58 cents total)
- Bought 1 – Dec 3.50 put – paid 11 cents
- Bought 1 – Dec/Dec 20 C.S.O. call – paid 5 cents
- Net Profit: 40 cents (after paying a 2 cent commission)
- The above options strategy only represents about 5% of production. To get to 15% I repeated the trade 3 times.
- If Dec corn is at or below $4.20 at expiration on 11/24/17 - I get somewhere between $3.90 - $4.40
- Every penny corn is below $4.20 to $4.00, 1 additional cent is added on to the $4.20 price (e.g. if it is $4 exactly I take home $4.40)
- Every penny corn is below $4.00 to $3.50, 1 cent is subtracted from $4.40 all the way down to $3.90 (if it is at $3.50)
- Anywhere under $3.50, and I still get $3.90 (5 cents below where the market was when I placed the trade)
- If Dec corn is above $4.20 – I have to take $4.20 on the 15% of production and I have to make another corn sale on 15% of production at $4.20 (even if corn is $4.50 or $5)
- If this happens, I'll most likely move this sale directly to the 2018 crop year
Corn closed under $3.50, so the $4.00 calls expired worthless. The puts were exercised, making me short Dec futures at $3.50. The C.S.O. option, a protection against a short US crop production and having to move the additional sale to 2018, was not used and expired worthless.
In the end, I kept the 40 cent premium collected from the call options after subtracting the cost of the put, C.S.O. and commissions and have a $3.50 sale. This means I received $3.90 total ($3.50 40 cents of premium). In hindsight, I should have just sold the corn at $3.95 last January, but I thought corn would eventually be in a higher range bound value. Still, considering current prices I’m fine with this sale. Having this trade in place minimized my farm operation risk while providing upside potential.
Trade # - 2 – (5% Production) – Wish Order – Sold Call
2/28/17 – At the time, I had a “wish order” in place to sell if a $4.50 Dec call hit 19.5 cents (it had been ranging between12-17 cents). On 2/28 there were rumored changes to the RFS (Renewable Fuel Standard) mandate, so the call value shot up to 19.5 cents for 5 minutes.
What Does This Mean?
- If corn is above $4.50 on Thanksgiving - I have to sell for $4.50 and keep 19.5 cents ($4.695 total)
- If corn is below $4.50 on Thanksgiving - I keep the 19.5 cents to use on another trade in the future
Corn never made it above $4.18, and closed at $3.40 so I kept the 19.5 cents to add to a future trade. Knowing what I know now, either scenario of this trade would have been a win for me. But, the real lesson here is how being prepared and including wish orders within grain marketing strategies can help farmers take advantage of opportunities that become available quickly and are short-lived. Farmers who don’t have a clear marketing plan outlined with price point objectives will almost always be at a disadvantage.
Trade # - 3 – (5% Production) – Sold Straddle
On 5/17/17 when Dec corn was $3.90 I sold a Dec $3.70 straddle for 48 cents (sold a $3.70 put and a $3.70 call - collecting a total of 48 cents)
- Expected Market Direction Late November - Assuming normal weather throughout summer, keeping the market steady to a little lower.
- Potential Benefit - If Dec futures close at $3.70 on 11/24/17, I keep all of the 48 cent premium
- Potential Concern - Reduced or no premium if the market moves and holds significantly in either direction
- Every penny lower than $3.70 I get less premium until $3.22
- $3.22 or lower - a new crop corn sale is removed, but any profits gained on that trade can be added to a future sale.
- Every penny higher than $3.70 I get less premium until $4.18
- $4.18 or higher - I have to make another corn sale at $4.18 against Dec futures
Corn was $3.40, so I bought back the $3.70 put for -$.30, making $.18 profit to be added to a future trade. This is another example of a straddle allowing me to “manufacturing premium” in a sideways (to slightly lower) market that is also under profitable levels for limited risk exposure (i.e. by limited risk exposure I mean that I understood and was comfortable with all possible scenarios of this trade). In mid-May I didn’t think $3.90 was necessarily a good sale; however, in hindsight I’m satisfied with this trade and can add the premium generated in this trade it to another trade down the road.
Trade # - 4 – (5% Production) – Bought a Put spread and Sold a Call
On 5/17/17 when Dec corn was $3.90. I bought a $3.80 Dec put and sold a $3.50 Dec put for 8 cents. I then sold a $4.10 Sep short-dated call (which is against the Dec) for 8 cents, to help offset the put spread cost.
- Trade Rationale – I didn’t want to sell more corn futures at $3.90, but I wanted some downside protection with upside potential
- Note: The Sep short dated call is based upon Dec futures but expired on 8/25/17
- What does this mean?
- Below $3.80 but above $3.50 I get $3.80 for my corn
- Below $3.50 I take the price of corn, but I add 30 cents on to the price
- Ex: $3.25 futures would mean my corn is worth $3.55
- Ex: $3.40 futures would mean my corn is worth $3.70
- Above $3.80 but below $4.10 I get whatever price corn is trading
- Above $4.10 on 8/25/17 - I only get $4.10 regardless how high corn goes.
- Additional note - if corn is below $4.10 on 8/25/17, the top end of the trade is removed and I can make another potential trade that would allow for additional premium
Corn was below $4.10 when the short date Sep option expired on 8/25/17, and then below $3.50 on 11/24/17 when the Dec options expired. Result, I made an additional 30 cent premium to be added to an upcoming trade.
Again, while I knew all potential outcomes of the trade when it was placed, in the end I was okay with the final result. I was able to secure additional premium during a lower trending market to help me ultimately try and protect my price points for some of my corn while minimizing my overall risk. Again hindsight will show I should have just sold grain back in May for $3.90 but at the time nobody really thought that was a good idea so early in the season with delayed plantings.
Trade # - 5 – (5% Production) – Sold Calls & Bought Put
6/7/17 – Dec corn futures were $4.00
- Sold 2 – Dec 4.00 calls – collected 29 cents each (or 58 cents total)
- Bought 1 – Dec 3.70 put – paid 11 cents
- Net profit: 45 cents (after paying just under 2 cents of commissions)
What Does This Mean?
Basically I have a $4.15 floor price and a $4.45 potential price ceiling.
- If Dec corn is near $4.20 at expiration - I get about $4.20 for my corn
- Every penny corn is below $4.22 to $4.00, 1 additional cent is added to the $4.20 price (e.g. if it is $4 exactly, I get $4.45)
- Every penny corn is below $4.00 to $3.70, 1 cent is subtracted from $4.45 until $4.15 (if it is at $3.70)
- Anywhere under $3.70, and I still get $4.15 (15 cents above where the market was when I placed the trade)
- If Dec corn is above $4.22 – I have to take $4.22 on the this sale AND make another $4.22 corn sale (even if corn is $4.50 or $5)
Corn closed below $3.70, so I had to sell at $3.70, but I keep the 45 cent profit. Meaning, I basically sold at $4.15 against Dec futures.
While in reality I received the worst possible scenario of this trade, knowing what I know today, I’m very pleased with receiving $4.15 for my corn. I received a price 2 cents off the high of the market for the year and had upside potential the whole time as well.
Trade # - 6 – (5% Production) – Sold Call
On 6/29/17, one day before the June 30th USDA report, I sold a $3.80 Dec call for 20 cents when Dec futures were around $3.80 at the time.
What does this mean?
- If Dec corn is above $3.80 on 11/24 - I have to sell corn for $3.80 and keep 20 cents (giving me $4.00 total)
- If Dec corn is below $3.80 on 11/24 - I keep the 20 cents to use on another trade in the future
Dec futures were below $3.80, so I kept 20 cents to be used on an upcoming trade.
Another success in selling a call to add additional premium. While like most farmers, I would prefer to have more corn sold at this point, “manufacturing premium” like this in the meantime is helping to ease the sting of a sideways to lower market a little.
Trade # - 7 – (10% Production) – Sold Call
On 8/24/17 when Dec corn was $3.55, I sold a Dec $3.60 call for 11.50 cents
What Does This Mean?
- If Dec corn is trading below $3.60 when this option expires - I keep the premium and add it to another trade down the road.
- If Dec corn is trading above $3.60 when this option expires - I have to sell corn for $3.60 PLUS the premium which would be like selling $3.705.
Corn was under $3.60, so the option expired worthless and I kept the 11.50 cents. Another example of successfully selling a call to help add profits to an upcoming trade.
Side Note - In the 7 trades above there were a few trades that partially offset each other. Trade #5’s long $3.70 put offset trade #3’s short $3.70 put (as a part of the $3.70 straddle). Also trade #4’s short $3.50 put offset some but not all of trade #1’s long $3.50 puts.
Final Result – Sold 15% of my corn for $4.48
These trades left me sold (or short futures) on about 15% of my ’17 production. 10% is sold at $3.50 and 5% at $3.80, which would be an average price of $3.60. Obviously, that’s not very impressive. However, all the premium generated above totals around 88 cents extra on that 15% of my production too. This means it is the equivalent of selling $4.48 futures.
In hindsight I wish I had more than 15% of my production sold, but had the market rallied to $5 last summer due to a drought, I would have been extremely disappointed in the outcome of these trades. But on a positive note, not only have I been “manufacturing premium” on these 7 trades, I have also collected 66 cents of premium on other options trades against another 15% of my production since late July. This means I essentially can have 30% of my 2017 crop priced for $4.27 futures. (Note, because I’m not selling any additional corn at $3.40 Dec futures today I don’t have this guaranteed yet.)
I still have a long ways to go on my remaining 70% unpriced grain for the ’17 production, but these examples above illustrate the importance of planning for all three possible market scenarios – Up, Down AND Sideways. Some farmers’ marketing strategy are only profitable if prices go up significantly. But, that only happens at best 33% of the time. Usually this means these farmers are UNPROFITABLE if prices are sideways or go down.
Successful farmers develop and optimize their grain marketing strategy to include all scenarios. Not only are they more profitable doing this, but they reduce their farm operation’s risk considerably.
Superior Feed Ingredients, LLC
This email material is for the sole use of the intended recipient, and cannot be reproduced, disseminated, distributed or electronically transmitted, including any attachments, without the prior written permission of Superior Feed Ingredients, LLC.. Even though the information contained herein is believed to be reliable, we cannot guarantee its accuracy or completeness, and the views and opinions expressed are subject to change without notice. Trading commodities involves risk and one should fully understand those risks before buying or selling futures or options. This data is provided for information purposes only and is not intended to be used for specific trading strategies.