Market Commentary for 9/20/24
Early corn yield reports from across the country are mostly good or great, and this includes areas that haven’t had any rain in the last month. The northern corn belt has had above average temperatures recently, which is helping advance crops quickly there too.
USDA estimates could still be too low, a national yield above 185 is still very possible. Corn prices may not decrease much more before the end of the year, but a rally could be very difficult.
Market Action
After the acreage report at the end of June, September corn was trading at $4.05 and December corn was around $4.20. Growing conditions across the US looked favorable, so I thought it was unlikely prices would rally before harvest.
At the time, I had downside protections in place at $4.50 on the December for my entire crop. However, I wanted to add to my floor value in case prices went lower or stayed in a sideways pattern.
I made the following option trades; each one was 10% of my expected production.
#1 – Sold August $4.05 Call – Collected 10 cents - based on September futures and expires in late July
- If corn was below $4.05 when the option expired, I would keep the 10 cents collected
- If corn was above $4.05 when the option expired, it forces a sale at $4.05, but with the 10 cents of premium it is like I sold $4.15
#2 – Sold September $4.00 Call – Collected 17 cents - based on September futures and would expire late August
- If corn was below $4.00 when the option expired, I would keep the 17 cents collected
- If corn was above $4.00 when the option expired, it forces a sale at $4.00, but with the 17 cents of premium it is like I sold $4.17
#3 – Sold October $4.20 Call – Collected 17 cents - based on December futures and would expire late September
- If corn was below $4.20 when the option expires, I would keep the 17 cents collected.
- If corn was above $4.20 when the option expired, it forces a sale at $4.20, but with the 17 cents of premium it is like I sold $4.37.
#4 – Sold September $3.90 Straddle and Bought $3.65 put – Collected 30 Cents - based on September futures and would expire in late August
- If corn was above $4.20 when the option expired, then it forces a sale at $3.90 but with the 30 cents or premium it’s like I sold $4.20.
- If corn was between $3.65 and $4.20, I wouldn’t have made a sale, but I would keep some of the 30 cents of premium I collected upfront. The closer the price is to $3.90 at expiration the more of the 30 cents I keep.
- If corn was below $3.65, I wouldn’t have made a sale, but I am guaranteed at least 5 cents profit on the trade.
#5 – Sold October $3.90 Straddle and Bought $3.75 Put – Collected 38 Cents - based on December futures and would expire in late September
- If corn was above $4.28 when the option expired, then it forces a sale at $3.90 but with the 38 cents of premium it’s like I sold $4.28.
- If corn was between $3.75 and $4.28, I wouldn’t have made a sale, but I keep more of the 38 cent of premium I collected up front. The closer the price is to $3.90 at expiration the more of the 38 cents I keep.
- If corn was below $3.75, I won’t have made a sale, but I am guaranteed at least 23 cents profit on the trade.
Why Did You Make These Trades?
After the USDA acreage report in early July, it seemed unlikely that corn would rally significantly before late August or September. It seemed most likely corn would be range-bound between $3.65 and $4.25, so I wanted to make trades that would take advantage of this possibility.
I also wanted to protect myself if the market went down, so I made sure none of the trades would lose money in a declining market. If the market continued to fall through late summer, the calls couldn’t lose money and the straddles had guaranteed floors for a small win no matter what.
My upside risk was the only real concern. If prices went up, these trades meant I would potentially have 50% of my crop priced at about $4.25. However, I had 70% of my crop covered with puts previously purchased in February that guaranteed floor prices with unlimited upside potential. Therefore, I knew I could sell my corn at any time I wanted. In reality though, with the information I had, I didn’t think the chances of a big rally were a concern
What Happened?
Corn prices went down. The August, September, and October calls expired below the strike prices. This meant I kept the profit of 10 cents, 17 cents, and 17 cents from the first 3 trades listed above.
I bought the September straddle back for 13 cents and made just over 16 cents on trade #4. And I bought back the October straddle for around 22 cents and made 16 cents on trade #5.
Bottomline
I averaged a 15-cent profit on each trade. Since these trades represent 50% of my production I get to add 7.5 cents per bushel to my final corn crop’s value. Or, an additional $13 per acre profit on 180 bushel per acre yields. With my floor prices guaranteed above $4.50 I’m happy with the result because I have now moved my floor price above $4.57.
While this had a positive outcome, it’s important to remember that selling options has risk. That’s why I evaluated all potential scenerios to be sure I was comfortable before placing each trade.
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