Scheve: How I Collected 65 Cents On 10% Of My Corn Production With 4 Options Trades
Nov 26, 2018
To get my enewsletter sent directly to you every week, send me an email: email@example.com
Market Commentary for 11/23/18
For the last 8 years the price of December corn on the last trading day of November has always been lower than the last trading day of October. Corn closed at $3.63 on Halloween.
On the other hand, for the last 8 years January beans on the last trading day of November were higher for 3 years, lower for 3 years and the same for 2 years. January beans were $8.52 on October 31.
How I Collected 65 Cents On 10% Of My Corn Production With 4 Trades
My Marketing Strategy Approach
I try to maintain a flexible marketing strategy that maximizes profit potential and minimizes risk. This means that some of my trades are most profitable if the market stays sideways, especially if there is a lot of rationale for minimal price movement in the short or long-term. Like all farmers, I'm most profitable if the market rallies above breakeven price points, and I always want that to happen. Unfortunately, there can be long periods of time where the market doesn't rally above breakeven points. That's why being open to alternative trade opportunities can be beneficial (selling calls). Still, while I'm open to alternative solutions, it's very important that for each trade I must fully understand any potential outcome and be willing to accept any result.
All 4 trades below were put on when different factors were affecting the market. In the end, I collected 65 cents of premium on 10% of my production, or 6.5 cents on all of my corn. While none of these trades allowed me to get additional sales in place, I'm satisfied with the final outcome.
Reader's Note - I believe in being fully transparent with my trade outcomes, which I think provides a better foundation for understanding and considering alternative opportunities. Still, the amount of detail can be overwhelming for those just wanting an overview. For those wanting a more summarized approach, just read the sections titled "What Happened" and "What Does This Mean".
Trade #1 - Corn Straddles
- On 1/18/18, when Dec corn was $3.85:
- Covering potentially 10% of 2018 production
- Sold a $3.70 straddle (where I sell both the put and call for the same price)
- Bought a $3.50 put
- Collected a total of 38 cents premium for the trade
- Options expire on the Friday after Thanksgiving
- Then on 2/9/18, when Dec corn was $3.93:
- Covering potentially another 10% of 2018 production
- Sold a $3.90 straddle
- Bought another $3.50 put
- Collected a total of 44 cents premium to place the trade
- Options expire on the Friday after Thanksgiving
What Does This Mean?
- If corn is below $3.57 on 11/23/18, I won't sell any corn with these trades. However, I still get to keep some of the premium. At most I'll make 30 cents of premium, if prices are $3.56. At worst I'll make 20 cents of premium if prices fall below $3.50, but on only 10% of my production.
- If corn is above $4.20 on 11/23/18, I have to sell 20% of my 2018 production for $4.20.
- If corn is $3.57 - $4.20, then I get a value of more than what corn prices were at when I put the second set of options in place. For instance, if futures prices are $3.70, then I would get $4.30 for my corn. If the futures price is $3.90, then I would get $4.50 but on only 10% of production.
Corn was trading at $3.60 on Friday, as the options were about to expire, I bought back the $3.70 and $3.90 puts for 10 cents and 30 cents respectively. I bought the options back because otherwise I would have been long corn, which as a producer I didn't want to have happen (why I avoid buying calls). I let both call options and the $3.50 put options all expire worthless.
In the end, I collected 42 cents total for both trades on 10% of my production that I will later add to my "pot of premium" on a future trade.
- 28 cents on the 1st trade (i.e. 38 cents collected - 10 cents to buy put back = 28 cents profit)
- 14 cents on the 2nd trade (44 cents collected - 30 cents to buy put back = 14 cents profit)
I could have sold corn for the $3.60 Dec futures right before the market closed and with the premium I would have received $4.02 on 10% of my production. But, as mentioned above, historically November prices are the season's low and market information suggest some upside potential is possible right now. So, I decided to wait to sell.
Trade #2 – Sold Corn Call
On 10/2/18 when Dec corn was near $3.68 I sold a Dec $3.70 call for 8 cents – expiring 11/23/18 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 8 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 $3.78 on Dec 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 $3.68 Dec futures, this trade allows me to get values higher than where they were on that today. If the market stays sideways, I keep the 8 cent premiums. There isn’t a downside protection with these trades, but that isn't the goal for this trade.
The market closed below $3.70, so the call expired worthless and I kept the 8 cents to put in my "pot of premium" for a later trade.
Trade #3 – Sold Corn Straddle
On 10/2/18 when Dec corn was around $3.68, I sold a Dec $3.65 straddle (selling both a put and call) collecting 20 cents total on 10% of my 2018 production.
What Does This Mean?
- If Dec corn is $3.65 on 11/23/18 I keep all of the 20 cents
- Every penny corn is below $3.65 I get less premium until $3.45.
- Every penny higher than $3.65 I get less premium until $3.85
- $3.85 or higher - I have to make a corn sale at $3.65 against Dec futures, but I still get to keep the 20 cents, so it’s like selling $3.85
- $3.45 or lower – I have to buy corn sales back or simply take a loss on the trade
My Trade Thoughts And Rationale from 10/2/18
With current production forecasts I think corn prices will stay sideways, and this trade is most profitable if it does. However, if the market drops significantly I'm not protected from losing money or may have to buy some corn back, but that's not my goal with this trade. With what I know today, I still want the market to rally and will be happy with a $3.85 sold price, because I have several other trades working that need prices above $3.85. I'm comfortable with any market outcome with this trade.
On 11/19/18 the market was $3.64. I bought back the put portion of the straddle for 3 cents, but left the call in place hoping for a rally above $3.65 on Friday and forcing me into a sale. In the end, the market closed under $3.65, so I didn't make a sale, but I kept 16 cents after commissions from the trade to add to my “pot of premium”.
Trade #4 – Sold Straddle
On 10/18/18 when Dec corn was around $3.70, I sold a December $3.80 straddle (selling both a put and call) and collecting just over 16 cents total on 10% of my 2018 production.
What Does This Mean?
- If Dec corn is $3.80 on 11/23/18, I keep all of the 16 cents
- Every penny corn is below $3.80 I get less premium penny for penny until $3.64.
- Every penny higher than $3.80 I get less premium penny for penny until $3.96
- $3.96 or higher - I have to make a corn sale at $3.80 against Dec futures, but I still get to keep the 16 cents, so it’s like selling $3.96
- $3.64 or lower – I have buy corn sales back or simply take a loss on this trade.
My Trade Thoughts And Rationale from 10/18/18
This trade is once again most profitable in a sideways market, which I think is the most likely scenario right now. If the market does nothing through 11/23/18, I'll profit similar to the trade above. With what I know today, I would be happy to sell corn for $3.96, even if prices exceed this amount in a month. I’m a little concerned with the downside risk but, it’s the middle of harvest and historically once harvest is over, and grain is stored, there is a modest price recovery.
Like the last 8 years, November prices are trending lower than late October prices. On 11/19/18 when corn was $3.64, I bought back the put for 16 cents and left the call open, not expecting prices to get back to $3.80 by Friday. After commissions, I lost 1 cent, so the trade was basically a wash.
Combined Results and Overview
Trade #1 = 42 cents on 10%
Trade #2 = 8 cents on 10%
Trade #3 = 16 cents on 10%
Trade #4 = -1 cent on 10%
Total profit = 65 cents on 10% of production after commissions
Knowing what I know today, I'm happy I made 65 cents of premium on 10% of my production, or 6.5 cents on ALL of my production. I made some low risk trades that allowed me to profit in a disappointing market. Until October I never risked more than 20% of my ‘18 production in sideways type of trades. I only added more when expected harvest results were known. This allowed me to make a little extra profit until the next rally, and if we don't hit profitable levels for a while I can use this "pot of premium" to get me there.
Once again, considering alternative solutions and including trades in my grain marketing strategy that take into consideration all market scenarios (i.e. up, down and sideways), was a good decision that help reduce my farm operation's risk while maximizing my profit potential.
Like this article? Check out more from Jon Scheve:
Why I Don't Think Buying Puts Is Always A Good Decision For My Operation
How I Added Another 49 Cents Of Profit To My 2018 Beans By Capturing The Carry
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387
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.