Scheve: Collecting 13 Cents Premium On 30% Of My 2018 Corn Production Over The Last 3 Months

Published on: 14:29PM Feb 25, 2019

To get my enewsletter sent directly to you every week, send me an email: [email protected]

Market Commentary for 2/22/19
The biggest news of the week was when Agriculture Secretary Perdue announced that China agreed to buy 10 million metric tons (about 400 million bushels) of beans Friday afternoon from the Oval office after the markets closed.  Earlier in the week President Trump said China would also buy more corn too.  While both statements seem positive, the market has already heard rumors and predictions before, only to be let down by smaller numbers due to a variety of reasons.  It will take follow through and actual purchases to get the market excited.
 
March corn closed again for the 13th straight Friday within the tight trading range of $3.74-$3.85.
 
Market Action 
With corn trading within a very tight range the last 3 months, including straddle trades in my grain marketing plan was a good decision for my farm operation.  Since late November, I placed 3 straddle trades that all expired on Friday that helped me generate 13.5 cents of profit on 30% of my corn production.  Details of each trade are shown below.
 
Straddle Trade #1:
On 11/19/18 when March corn was around $3.75, I sold a March $3.80 straddle (selling both a put and call) and collected just over 23 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 23 cents
  • Every penny corn is below $3.80 I get less premium penny for penny until $3.57.
  • Every penny higher than $3.80 I get less premium penny for penny until $4.03
  • $4.03 or higher - I have to make a corn sale at $3.80 against March futures, but I still get to keep the 23 cents, so it’s like selling $4.03
  • $3.57 or lower – I have to take a loss on this trade penny for penny below $3.57.

My Trade Thoughts and Rationale When Placing the Trade:
This trade is most profitable in a sideways market, which I think is the most likely scenario right now. March futures have not exceeded $3.95 since Mid-August, so I would be happy if prices rallied and I was forced to make a sale above $4.00. Historically the market doesn’t trade lower in late February than the previous November, so I think a big price drop is really unlikely.  If the market stays sideways, I collect more money than doing nothing, or even making a sale today.
 
What Happened?
With futures around $3.77 on Friday, I bought back the put portion of the straddle for 4 cents after commissions.  The call option expired worthless, so I made a net profit of 19 cents on this trade that I will add to a later sale.  
 
Straddle Trade #2
On 12/17/18 when March corn was around $3.85, I sold a March $3.80 straddle (selling both a put and call) and collected just over 19 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 19 cents
  • Every penny corn is below $3.80 I get less premium penny for penny until $3.61.
  • Every penny higher than $3.80 I get less premium penny for penny until $3.99
  • $3.99 or higher - I have to make a corn sale at $3.80 against March futures, but I still get to keep the 19 cents, so it’s like selling $3.99
  • $3.61 or lower – I have to take a loss on this trade penny for penny below $3.61.

My Trade Thoughts and Rationale When Placing the Trade:
This trade is most profitable in a sideways market, which I think is the most likely scenario right now.  If corn rallies, I'll be happy selling for $3.99.  On the flip side, I think downside risk is minimal.  End users recently have been buyers below $3.75.  Usually once harvest is over and grain is stored, there is a modest price recovery in the first part of the year.
 
What Happened?
Similar to the trade above, I bought back the put on Friday for 4 cents, leaving me with a 15-cent profit that I'll add to a later trade.  Again, I’m ahead using this trade strategy over almost any other trading scenario during this time period.
 
Saddle Trade #3 
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.  The market has rarely dipped below $3.70 in the last 3 months, so I think a significantly price drop is unlikely before the options expire.  If the market continues the $3.75-$3.85 range for closes on a Friday, I'll make at least 7 cents on this trade.
 
What Happened?
Just like the 2 trades above I bought the puts back for 4 cents and was left with an 8 cent profit I can add to a later trade.  This trade too turned out to be the most profitable scenario I could have made in the last 30 days for my position.
 
Final Thoughts
Like all farmers, I wish that corn would rally significantly, so I could sell my corn at higher, more-profitable levels.  But I don't know when that's going to happen again, and I can't just sit around waiting and hoping.  I have corn to sell.  In the meantime, I'm happy collecting this added premium detailed above, so that I can try and manufacture profitable prices for my corn.  During this long-term sideways market, it brings me peace of mind having trades in place that generate profit, if the market goes nowhere, while I wait for some significant market movement.   

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

Thinking Of The Farm As A Business

Selling Hope And Time

Tell Your Friends And Neighbors To STOP USING FREE DP

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

A Market That Goes Nowhere Can Still Provide Opportunity

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

The Pros And Cons Of Selling Straddles

Capturing Carry And Paying For Storage

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

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


Jon Scheve
Superior Feed Ingredients, LLC
[email protected]
 
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.