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

Published on: 15:10PM Dec 24, 2018

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Market Commentary for 12/21/18

There are so many factors that could affect the corn futures market. It's easy to rationalize why the market could be headed for a rally or a decline at any given time.  Following lists several reasons to be bullish or bearish corn right now.

Reasons To Be Bullish Corn:

  • Exports have been really strong
  • US projected carryout is the tightest it’s been since 2014
  • World projected carryout has been getting tighter the last couple of years
  • Rumors of Chinese interest in buying US corn
  • US feed demand is expected to remain steady or be higher for the next year based upon animal numbers
  • The ethanol mandate makes it likely demand for corn in this sector will remain steady
  • Basis values are significantly higher than during the harvest

Reasons To Be Bearish Corn:

  • Money managers are buying corn and prices haven't increased
  • Ethanol plants complain they aren’t profitable and no additional needs beyond the mandate are needed
  • The South American crops looks good so far and exports will start soon
  • Ukraine continues to compete with the US on price, potentially hurting additional US export demand
  • Technical indicators suggest corn futures could drift lower

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

This week I heard an analyst say he was against selling options even with the odds that 85% of the time options expire worthless.  When someone sells an option and it expires worthless, the seller keeps the premium and the buyer is out the premium.  I've sold quite a few CORN calls and straddles this year and I've had significant success doing it, which has allowed me to generate some premium during this prolonged sideways market.

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

How I Collected 18 Cents On Some Of My Corn In A Sideways Market

The analyst warned farmers against selling calls because of their high risk exposure.  I agree, any time I sell an option (selling calls and selling straddles) I'm very careful to fully understand EVERY possible outcome and I have to be willing to accept all possible scenarios (i.e. up, down or sideways).  Still, it's hard to dismiss that a large portion of options expire worthless, which means those selling calls keep the premium most of the time and the buyers lose most of the time.  In my opinion, the odds are pretty good that I should at least consider alternative solutions and strategies during this tough time.

I had two trades expire this week and captured 29 cents of premium on 10% of my ’18 production. Rather than waiting and hoping for a price rally to come, it gives me piece of mind knowing I have a chance to generate some premium I can later add to my corn prices to make sure I have the best chance at selling all of my corn at profitable levels.  Following are the details.

Sold Corn Call

On 10/2/18 when March corn was near $3.80, I sold a January $3.80 call for 10 cents – expiring 12/21/18  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 10 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 $3.90 on March futures. 

My Trade Thoughts And Rationale On 10/2/18

Since I still need to sell some of my remaining '18 corn, but I don’t want to sell $3.80 March futures, this trade allows me to get higher values than are available today.   If the market stays sideways, I keep the 10 cent premiums and can make this type of trade again to add even more premium. There isn’t downside protection with this trade, but that isn't the goal for this trade.

What Happened?

The price of March corn was $3.78, which was under the $3.80 strike price I sold, so the option expired worthless and I will keep the 10 cents to add to my pot of premium.

Sold Straddle:

On 10/2/18 when March corn was around $3.77, I sold a January $3.75 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 $3.75 on 12/21/18, I keep all of the 23 cents
  • Every penny corn is below $3.75 I get less premium penny for penny until $3.52. 
  • Every penny higher than $3.75 I get less premium penny for penny until $3.98
  • $3.98 or higher - I have to make a corn sale at $3.75 against March futures, but I still get to keep the 23 cents, so it’s like selling $3.98
  • $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:

This trade is most profitable in a sideways market, which I think is the most likely scenario right now.  If the market goes nowhere on 12/21/18, I'll profit similar to the trade above.  With what I know today (10/2/18), I'll be happy to sell corn for $3.98. I’m a little concerned with the downside risk right now but, it’s the middle of harvest and historically once harvest is over, and grain is stored, there is usually a modest price recovery.  

What Happened?

On 12/20/18, the day before the option expired, corn was trading around $3.75, so I bought back both sides of the straddle for just over 3 cents with commissions included, and made about 19 cents I can add to my pot of premium. 

I bought back the straddle with one day left because the market went down 4 cents the day before the option expired, so I was concerned the market could move more than 3 cents on that last trading day.  I knew I was going to have to buy at least one side of the options back for 1-2 cents on the final trading day, so to reduce my risk, I collected my guaranteed profit and moved on.  In hindsight it didn't matter though.  The market ultimately ended at $3.78, so I would have had to spend 3 cents to get out of the straddle anyway.

New Trades - Another Sold Call And Straddle

Knowing that I would likely get a sizeable amount of premium with my sold call and straddle positions above, and fearing that the sideways market would continue in the short-term, I sold another call and straddle.  Following are the details.

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 premiums and can make this type of trade again to add even more premium. There isn’t downside protection with this trade, but that isn't the goal for this trade.

Sold Straddle:

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 the market has gone nowhere on 2/22/19, I'll profit similar to the trade above.  With what I know today (12/21/18), I'll be happy to sell corn for $3.99. While downside risk is present with this trade, I’m not very concerned because end users seem to be buyers below $3.75.  Harvest is over, the grain is stored, and historically there is usually a modest price recovery over the next couple of months.  

Final Thoughts

For me the prolonged sideways market at unprofitable levels is making me consider trades I may not have in the past.  The market has been trading sideways for a long time and looks like it will continue, so rather than waiting for a rally, I'm doing trades that according to one analyst have an 85% chance of collecting premium while still being willing to accept all possible outcomes if the market goes up, down or sideways.

I'm pleased to collect the 29 cents of premium from the first two trades.  With this added premium, if the market goes down unexpectedly, I have some cushion to protect me from significant loss on the second two trades that are now in place.  A rally would allow me to sell 20% of my 2018 production for an average price of $4.10 against the March futures, which with what I know today I would be happy to accept.  Plus, if it rallies further, I have even more corn to sell to take advantage of a bigger rally.  If the market does nothing, I generate some more premium to add to a later trade.  

As long as I understand all possible outcomes, I'm comfortable considering alternative strategies with a PORTION of my production where I'm profitable when the market goes nowhere.  

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

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

Capturing Carry and Paying for Storage

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

Jon Scheve

Superior Feed Ingredients, LLC

9358 Oak Ave

Waconia, MN   55387

Tel:  952-442-2380

Cell: 402-681-4867

Fax: 952-442-4945

jon@superiorfeed.com

 

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