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Scheve: A Market That Goes Nowhere Can Still Provide Opportunity

Published on: 20:06PM Jan 28, 2019

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Market Commentary for 1/25/18

Corn continues to trade sideways with Friday’s close at $3.80, which is between $3.75 to $3.85 for the 9th straight week.  It was a quiet week for corn, basis levels firmed slightly indicating end users are not getting enough bought to meet their needs.

The USDA said if the government is open by Monday, they plan to publish the February report on time. This is welcome news as it could give the market new information to trade and gives more insight into the supply and demand of the corn market.

A Market That Goes Nowhere Can Still Provide Opportunity

During this ongoing sideways market with prices below profitable levels, I once again had 2 sold option strategies pick up 14 cents of premium on 10% of my 2018 production.  While I would like to get more corn sold, picking up this added premium helps me sleep at night knowing I'm doing something to increase my farm operation's profits instead of waiting and hoping for a rally.  

As always, I fully understand and am willing to accept any possible market outcome (up, down or sideways) before placing ANY trade.  Following are the details of two trades that expired on Friday which was February options expiration.

Trade #1 Results - Sold Call:

On 12/17/18 when March corn was near $3.85, I sold a February $3.85 call for just over 7 cents – expiring 1/25/19 on 10% of my ’18 production.

What Does That Mean?

  • If corn is trading below the strike price when this option expires - I keep the 7 cent premium and add it to another trade later.
  • If corn is trading above the strike price when this option expires - I have to sell corn for the strike price PLUS I keep the premium. This means a price of $3.92 on March futures.

 

My Trade Thoughts And Rationale On 12/17/18

Since I still need to sell some of my remaining '18 corn, but I don’t want to sell $3.85 March futures, this trade allows me to try and get higher values than are available today. If the market stays sideways, I keep the 7 cent premium. There isn’t downside protection with this trade, but that isn't the goal for this trade.

What Happened?

The market closed at $3.80, so I kept nearly 7 cents after commissions that can be added to a later trade.  Even though corn is 5 cents lower than when I sold the call, the premium offsets that loss, and I could sell corn with the premium added for more than the day I sold this call.  However, I still think there is upside potential for the corn market, so I’m going to wait before making a sale.

Trade #2 Results - Sold Straddle:

On 11/19/18 when March corn was around $3.75, I sold a February $3.70 straddle (selling both a put and call) and collected just over 18 cents total on 10% of my 2018 production.

What Does This Mean?

  • If March corn is $3.70 on 1/25/19, I keep all of the 18 cents
  • Every penny corn is below $3.70 I get less premium penny for penny until $3.52. 
  • Every penny higher than $3.70 I get less premium penny for penny until $3.88
  • $3.88 or higher - I have to make a corn sale at $3.70 against March futures, but I still get to keep the 18 cents, so it’s like selling $3.88
  • $3.52 or lower – I have to take a loss on this trade penny for penny below $3.52.

 

My Trade Thoughts And Rationale When Placing the Trade (11/19/18):

This trade is again most profitable in a sideways market, which I think is the most likely scenario in the short-term.  Still, if the market rallies, I'll be happy to sell corn for $3.88, with what I know today.  While I'm prepared if the market goes down, significantly, I think the chances are low with harvest nearly complete.  There is usually a modest price recovery in December.

What Happened?

On 1/25/19 I bought the call portion of the straddle back for 9 cents, so after commissions I collected over 8 cents of premium that I can add to a later trade. 

NEW TRADE - Sold Straddle:

With the success of these two trades, and the sideways market expected to continue, I sold another straddle.

On 1/25/19 when March corn was around $3.79, I sold a March $3.80 straddle (selling both a put and call) and collected just over 12 cents total on 10% of my 2018 production.

What Does This Mean?

  • If March corn is $3.80 on 2/22/19, I keep all of the 12 cents
  • Every penny corn is below $3.80 I get less premium penny for penny until $3.68. 
  • Every penny higher than $3.80 I get less premium penny for penny until $3.92
  • $3.92 or higher - I have to make a corn sale at $3.80 against March futures, but I still get to keep the 12 cents, so it’s like selling $3.92
  • $3.68 or lower – I have to take a loss on this trade penny for penny below $3.68.

 

My Trade Thoughts And Rationale When Placing the Trade:

This trade is again most profitable in a sideways market.  If the market is range-bound another 4 weeks, I'll profit similar to the trades above.  If the market rallies, I'd be happy to sell at $3.92.  I'm slightly concerned about the downside, but the market has rarely dipped below $3.70 in the last 3 months, so I think it's unlikely to happen.  If the market continues the $3.75-$3.85 range mentioned above, I'll make at least 7 cents on this trade.

Summary

If corn is above $3.80 on 2/22/19, I'll be able to take the 20 cent premium from both of these sold straddles (8 cents and 12 cents) and sell 10% of my corn production for $4.00.  While I would love for the market to rally more than that, manufacturing a plan to get $4 corn if prices stay the same helps to reduce my risk and increase my farm operations profit potential.  I prefer this strategy over doing nothing while waiting for prices to rally.  After all, I'll have more corn to sell by next year's harvest and it will be here before I know it.

 

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

The Dreaded Margin Call And Why I Don't Fear It

Current Corn Fundamentals: Why I Think There Is Price Rally Potential

The Pros And Cons Of Selling Straddles

How I Collected 29 Cents Of Premium On 10% Of My 2018 Corn Production

Capturing Carry And Paying For Storage

What I'm Doing With Some Of My Remaining Unsold 2018 Corn

How I Collected 65 Cents On 10% Of My Corn Production With 4 Options Trades

Why I Think Buying Calls Is Gambling And Why I Avoid It

Answering Reader Questions - Fear Of Missing Out And Margin Calls

 

Jon Scheve

Superior Feed Ingredients, LLC

jon@superiorfeed.com

 

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