Part 2. Accumulators: the good, the bad and the ugly
Sep 26, 2017
We are running a week long series on the OTC commodity structure known as the Accumulator. The trade is simple, yet very complex. Understanding the trade, its risks and when to avoid it will be the focus of the five part series.
Part 2. The Double Up
Yesterday we covered what the Accumulator is. We also mentioned the many forms of the Accumulator. The many different names and slight variations may lead you to think that there is a wide selection. It's the same trade folks. You are selling calls to pay for puts. Consumers, flip this around, you are selling puts to pay for calls.
Today let's talk about the double up feature of the Accumulator. We'll keep this very simple. The Accumulator has high value if you want the trade to double up. Key point: If you are afraid of the double up, your timing is off for this structure.
Let's take the case of the corn producer and consumer. (tomorrow we'll use sugar as an example)
Corn Producer - December won't work, there are only 43 days left and implied volatility is really low... Let's look at CH18 which has 104 trading days and is currently trading at $3.65. Depending on your broker you will "accumulate" swaps / futures at $3.80 and knock out around $3.50. You will also "double up at $3.80". Do you really want to be obligated to sell double quantities at $3.80? We don't have the market right now to do this trade. If we have $6 corn and 35% implied volatility, yes (provided we don't have a major drought going on).
Corn Consumer - You're buying corn everyday to make something or feed something. In order to run your business, you need to do this. For you selling puts is not a big deal and getting double up 15 cents below current market is great.
The point is that Accumulators should be used when extremes are in your favor, such as in the case of the Consumer.
Part 3 of the Accumulator Series tomorrow...
Pack Creek Capital constructs and manages hedge portfolios for companies in the grains, softs and energy markets. Contact firstname.lastname@example.org for more information.