Scheve: How I Used Sep Options To Keep My Upside Open And Get 20 Cents More Than Current Prices

Published on: 14:49PM Aug 27, 2018

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Market Commentary for 8/24/18

Wheat values dropped 40 cents last week, the biggest weekly decrease in 2 years.  Wheat had been pulling up corn prices some, so this probably contributed to corn prices being down another 20 cents this week.  While this is disappointing, both of these crops still have upside potential after the new year due to dry weather outside of the US. Global buyers may need to come shopping for US grain eventually.

Historically corn prices decrease during the last week of August, because many end users set Aug 30th as the final day to price any deferred-priced (DP) grain in storage and farmers with these type of positions tend to wait until the last possible moment for a rally. 

With no resolution to the trade war this week and an expected record soybean crop, soybean futures also lost some ground.  Add to that, soybean basis bids (cash bids) are at the lowest levels in many years,  I actually think futures are holding well. Futures may eventually drop even further trying to eclipse the value of the Chinese tariffs and be on par with Brazilian bean prices. Without a change in basis levels or the trade dispute there seems to be little hope for a sustained futures rally.

Market Action - September Trade Results - How Did I Do

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 (i.e. 2017). That's why being open to alternative trade opportunities can be beneficial. I have several trades below that when combined together show profit potential from a market move in any direction .  Still, while I'm open to alternative solutions, for each trade I must fully understand any potential outcome and be willing to accept any result. 

6 Trades and the Final Results Summary

These trades were put on at varying times between March and July during different market factors. Rationale and though processes used in late spring were much different from late July.

The 6 trades detailed below allowed for me to stay flexible with multiple market price points depending on where the market was in late August. Ultimately, these 6 trades when combined allowed me to sell 50% of my '17 production for $3.68, which was about 20 cents higher than where the market closed on Friday.

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 "My Trade Thoughts" and "Final Results."  

Trade #1 – Sold Call

On 6/18/18 when Sep corn was near $3.65 I sold the following call:

  • Sold an Sep $3.95 call for 9 cents – expires Aug 24th on 5% of my ’17 production
  • If corn is trading below the strike price when this option expires - I keep the 9 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 $4.04 on Sep futures. 

 

My Trade Thoughts And Rationale On 6/18/18

Since I still need to sell some of my remaining '17 corn, but I don’t want to sell $3.65 Sep futures, this trade allows me to get values close to $4 if there is a rally.  If the market stays sideways, I keep the 9 cent premiums. There isn’t a downside protection with these trades, but that isn't the goal for this trade.

Final Results

Corn closed below $3.95, so I kept the 9 cent premium to add to my "pot of premium" I've been collecting all year.

Trade #2 – Sold Call

On 7/19/18 when Sep corn was near $3.51 I sold the following call:

  • Sold an Sep $3.50 call for 10 cents – expires Aug 24th on 10% of my ’17 production
  • 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 $3.60 on Sep futures. 

 

My Trade Thoughts And Rationale from 7/19/18

Since I still needed to sell some of my remaining '17 corn, but I don’t want to sell $3.50 Sep futures, this trade allows me to get a slightly higher value.  If the market stays sideways, I keep the 10 cent premiums. There isn’t a downside protection with these trades, but that isn't the goal for this trade. 

Final Results

Corn was below $3.50 at expiration so I kept the 10 cent premium.

Trade #3 – Sold Straddle

On 7/18/18 when Sep corn was around $3.48, I sold an Sep $3.45 straddle (selling both a put and call) and bought a $3.30 Sep put, collecting 15 cents total on 10% of my 2017 production.

What Does This Mean?

  • If Sep corn is $3.45 on 8/24/18 I keep all of the 15 cents
  • Every penny corn is below $3.45 I get less premium until $3.30.  With the $3.30 put I won't lose anything on the trade, but I don’t have any additional grain protected to the downside or sold.
  • Every penny higher than $3.45 I get less premium until $3.60
  • $3.60 or higher - I have to make a corn sale at $3.45 against Sep futures, but I still get to keep the 15 cents, so it’s like selling $3.60

 

My Trade Thoughts And Rationale from 7/18/18

This trade is most profitable in a sideways market.  With the current good weather forecasts, I'd be happy collecting the premium to add to another opportunity later.  However, if the market drops significantly I'm also protected from losing money or having to buy corn back with this trade. With what I know today, I would prefer that the market would rally and I'll be very happy with a $3.60 sold price because I have a lot of different trades already working that need prices to be above $3.60.  I'm comfortable with any market outcome with this trade.

Final Results

Corn was trading $3.49 one hour before expiration, so I bought back the $3.45 call for 5 cents (including commissions).  The rest of the trade expired worthless.  Final result - I received 10 cent premium to add to my "pot of "premium" for the year.

Trade #4 - Sold Straddle

On 4/17/18 with Sep corn around $4, I sold a Sep $4 straddle (selling both a put and call) and bought a $3.60 Sep put, collecting 41 cents total on 10% of my 2017 production.

What Does This Mean?

  • If Sep corn is at $4.00 at expiration on 8/24/18 I keep all of the 41 cents
  • Every penny corn is below $4.00 I get less premium until $3.60.  With the $3.60 put I will lose nothing on this trade, but I don’t have any additional grain protected to the downside or sold.
  • Every penny higher than $4.00 I get less premium until $4.41
  • $4.41 or higher - I have to make a corn sale at $4.00 against Sep futures, but I still get to keep the 41 cents so it’s like selling $4.41

 

My Trade Thoughts And Rationale from 4/17/18

This trade is most profitable in a sideways market, but I'm also protected from losing money, or buying corn back, if the market drops significantly. I'll be happy with a $4.41 sold price, if the market rallies.  But, if the market stays sideways, I'll be just as happy collecting the premium and adding it to a later opportunity.

Final Results

This trade was about a wash, I made and lost nothing.  In reviewing my rationale for the trade, it’s clear in mid-April I didn't expect prices to fall so much.  I was more worried about upside limits than downside risk.  While I didn't lose anything on this trade, with hindsight I should have just sold corn on 4/17/18, instead of trying to get more.

Trade #5 – Sold Straddle

On 3/20/18 when Sep corn was around $3.90 I bought a Sep $3.80 straddle (sold both the $3.80 put and $3.80 call) and bought a $3.60 put.  I collected 34 cents of premium and I placed about 10% of my ’17 production in this trade. The trade expires at the end of August.

  • If Sep futures close at $3.80 on 8/24/18, I keep all of the 34 cent premium.
  • Every penny lower than $3.80 - I get a penny less of my premium until $3.60.
  • $3.60 or lower - I don’t sell anything, but I’m guaranteed at least 14 cents of premium, that I can apply to my pot of premium I have been collecting this year for the ’17 crop.
  • Every penny higher than $3.80 - I get a penny less of my premium until $4.14
  • $4.14 or higher - I have to make a corn sale at $3.80 against Sep futures, but I still get to keep the 34 cents so it’s like selling $4.14

 

My Trade Thoughts And Rationale from 4/17/18

This trade is most advantageous if the market remains steady or higher.  Even if the market drops, I’m guaranteed to not lose any money from the options. 

Final Results

The market peaked in May and finished under $3.60.  I collected 14 cents to add to my "pot of premium" for the year.  

Trade #6 - Sold Call & Bought Puts

On 7/31/18 when Sep corn futures were $3.70, I did the following 2 trades at the same time:

  • I bought Sep $3.60 puts to cover 50% of my 2017 production for 4 cents
  • I sold a March $3.90 call for 24.5 cents on 10% of my 2018 production.
  • Basically, I bought 5 - Sep puts for every 1 - March call I sold.  
  • After commissions, I was able to net just over a 1 cent premium between the 2 trades.

 

What Does This Mean?

These trades, along with all of my other positions already in place provide me with good protection for any outcome of the August USDA report. 

  • With a Bullish Report – I only have to sell 10% of my production for slightly below $4 pending where prices are in late February.
  • Under a Bearish Report - I'm protected at only 10 cents below what the market was trading for the day I made the trade until August 24th two weeks after the report.
  • In a Sideways Report - All of my other trades that I have already working likely would put additional money in my "pot of premium" to add to my sales prices later.
  • There is a chance that both trades could actually get hit.  Prices could tumble in the next 2 weeks and I could have the puts make money or get exercised and then after harvest the market could rally high enough that my March calls also get exercised. Before the report and now after, I would be happy with that outcome knowing what I know today.

 

Final Results

Sep corn futures were below $3.60, so I let these options get exercised on 50% of my '17 production.  Also, the March option could still get exercised if corn rallies in late winter. With the March futures 15 cents below that strike price, I don't want to spend the 12 cents it would have costed me on Friday to buy the call back right now. That cost would lower my results from this trade by more than 2 cents on all of the bushels I just sold. I’m hopeful corn will rally and I have to sell another 10% of my production at higher values.

Combined Results and Overview

Following is a quick review of the trades above:

  • Trade #1 = 9 cents on 5%
  • Trade #2 = 10 cents on 10%
  • Trade #3 = 10 cents on 10%
  • Trade #4 = 1 cent on 10%
  • Trade #5 = 14 cents on 10%
  • Trade #6 = 50% of production sold at $3.60
  • Total profit from trades 1-5 was about 40 cents on 10% of production or about 8 cents on 50% of production, which I added to my $3.60 sold price - around $3.68 last Friday.

 

Hindsight Observations

Knowing what I know today, I wish I would have sold more before Memorial Day.  But, as I look through my notes, weather forecasts were largely negative.  Most called for hot and dry weather with little rain.  Few expected a record crop and even with a record crop it still did not suggest that prices had to be this low.  At the time there seemed to be more risk the market would go up than down.  Still, I'm glad I placed the trades I did above, to protect myself if prices fell. I'm still ahead 20 cents versus doing nothing.

On a positive note, I did manage to sell over 25% of '18 corn during last May's rally above $4.20, which allowed me to get a good start on marketing sales for this upcoming harvest. 

 

Jon Scheve

Superior Feed Ingredients, LLC

[email protected]

 

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