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

Published on: 17:16PM Dec 10, 2018

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Market Commentary for 12/7/18

Nothing concrete happened during the Trump Xi meeting, so the market continues to trade sideways.  Since June 15th the March '19 corn board never closed above $4.00 and has only closed below $3.60 3 times.  Past performance is certainly not a guarantee, but it would seem possible that this range could continue for several more months.

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

Right now I only have about 46% of my '18 corn production priced on futures, so I need to develop a plan to get the rest priced.  With corn prices below profitable levels for the foreseeable future, I want to manufacture trades that can help me maximize my profit potential as much as possible, while still minimizing my risk exposure.  That’s why I recently did several trades that take advantage of the current sideways market to help me get some extra premium.  For me this is a better strategy than waiting around hoping for a rally, because I'm not sure when or if that's going to happen, and I have corn that needs to be sold.  

Here is a summary of the trades I placed over the 2 months.  For full trade detail and my rationale for making each trade see the section “Trade Details and Rationale” at the bottom.

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. (Why I like selling calls)

Sold Saddle #1 - 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.

Sold Saddle #2 - 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.

Sold Saddle #3 - 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 - The Importance Of Planning For Any Possible Market Scenario

These trades are most profitable in a sideways market, which seems like the most probable outcome right now with what I know today. However, I still make sure I never place a trade unless I'm comfortable with every possible market scenario happening (i.e. up, down or sideways).  Following summarizes how I'll be affected with these trades collectively for any possible market outcome.

Market Rallies - If March futures average above $3.94 each time the options above expire, I will have an additional 40% of my production sold for a maximum price of $3.94 against March futures.  This price hasn't happened since mid-August, and with what I know today, I'd be happy with that outcome.  After including my other grain marketing strategies I already have in place, my average price would be $4.10 sold against March futures.

Market Goes Down - Historically March futures don't often decrease through the winter.  Still I need to be prepared for everything.  Overall, I could lose 11 cents on about 10% of my production if prices fell to $3.50 and I would be down 41 cents on 10% of production if prices are at $3.40 each time the options expire.  While this seems unlikely to happen at this point, I will still be watching the market closely and will place protections on these trades quickly to minimize any losses should the market look to head significantly lower. 

Market Stays Sideways - If March futures are at $3.60 or $3.90 I don’t have to make any sales, but I'll collect around 29 cents of additional premium on 10% of my production.  But, I could collect about 60 cents of premium on 10% of production if the average futures price level is between $3.70 and $3.80 each time the options expire. Either way, I'll add the premium I collect to later trades, hopefully bumping me up to profitable levels.

These trades allow me to make more money during a sideways market than doing nothing. I have to be comfortable with any market scenario happening, but now I’m less worried about the "when and if" of the next market rally.  For me, focusing on a strategic plan for my grain marketing, rather than just hoping for a rally to sell, helps me sleep easier at night.

Trade Details and Rationale

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.

Sold Straddle Trade #1:

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 does nothing through 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.  

Sold Straddle Trade #2:

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:

This trade is again most profitable in a sideways market, which I think is the most likely scenario.  If the market is range-bound though the end of January, I'll profit similar to the trades above.  With what I know today I'll be happy to sell corn for $3.88. With harvest nearly complete I'm less worried about downside risk, plus there is usually a modest price recovery in December.  

Sold Straddle Trade #3:

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 once again is most profitable in a sideways market.  If the market continues to be range bound through February, I'll profit similar to the trades above.  Knowing what I know today, I'd be happy selling for $4, especially since it's higher than the previous 2 straddles.  I’m more concerned with the downside risk at this point than being forced to make a sale above $4.00.  

Want more articles from Jon Scheve?  Check out these recent articles:

Capturing Carry And Paying For Storage

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

 

Jon Scheve

Superior Feed Ingredients, LLC

[email protected]

 

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