The following commentary does not necessarily reflect the views of AgWeb or Farm Journal Media. The opinions expressed below are the author's own.
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The following commentary does not necessarily reflect the views of AgWeb or Farm Journal Media. The opinions expressed below are the author's own.
As a farmer and grain marketer Jon provides a practical grain marketing education to farmers. Jon explains how to reduce risk while maximizing profits using storage, market carry and basis. Often real-life trade detail is provided to illustrate unique ways farmers can market their grain in uncertain and volatile markets.
To get my enewsletter sent directly to you every week, send me an email: jon@superiorfeed.com
Market Commentary for 12/21/18
There are so many factors that could affect the corn futures market. It's easy to rationalize why the market could be headed for a rally or a decline at any given time. Following lists several reasons to be bullish or bearish corn right now.
Reasons To Be Bullish Corn:
Reasons To Be Bearish Corn:
Market Action - How I Collected 29 Cents Of Premium On 10% Of My 2018 Corn Production
This week I heard an analyst say he was against selling options even with the odds that 85% of the time options expire worthless. When someone sells an option and it expires worthless, the seller keeps the premium and the buyer is out the premium. I've sold quite a few CORN calls and straddles this year and I've had significant success doing it, which has allowed me to generate some premium during this prolonged sideways market.
What I'm Doing With Some Of My Remaining Unsold 2018 Corn
How I Collected 65 Cents On 10% Of My Corn Production With 4 Options Trades
How I Collected 18 Cents On Some Of My Corn In A Sideways Market
The analyst warned farmers against selling calls because of their high risk exposure. I agree, any time I sell an option (selling calls and selling straddles) I'm very careful to fully understand EVERY possible outcome and I have to be willing to accept all possible scenarios (i.e. up, down or sideways). Still, it's hard to dismiss that a large portion of options expire worthless, which means those selling calls keep the premium most of the time and the buyers lose most of the time. In my opinion, the odds are pretty good that I should at least consider alternative solutions and strategies during this tough time.
I had two trades expire this week and captured 29 cents of premium on 10% of my ’18 production. Rather than waiting and hoping for a price rally to come, it gives me piece of mind knowing I have a chance to generate some premium I can later add to my corn prices to make sure I have the best chance at selling all of my corn at profitable levels. Following are the details.
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?
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.
What Happened?
The price of March corn was $3.78, which was under the $3.80 strike price I sold, so the option expired worthless and I will keep the 10 cents to add to my pot of premium.
Sold Straddle:
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?
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 goes nowhere on 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.
What Happened?
On 12/20/18, the day before the option expired, corn was trading around $3.75, so I bought back both sides of the straddle for just over 3 cents with commissions included, and made about 19 cents I can add to my pot of premium.
I bought back the straddle with one day left because the market went down 4 cents the day before the option expired, so I was concerned the market could move more than 3 cents on that last trading day. I knew I was going to have to buy at least one side of the options back for 1-2 cents on the final trading day, so to reduce my risk, I collected my guaranteed profit and moved on. In hindsight it didn't matter though. The market ultimately ended at $3.78, so I would have had to spend 3 cents to get out of the straddle anyway.
New Trades - Another Sold Call And Straddle
Knowing that I would likely get a sizeable amount of premium with my sold call and straddle positions above, and fearing that the sideways market would continue in the short-term, I sold another call and straddle. Following are the details.
Sold Call:
On 12/17/18 when March corn was near $3.85, I sold a February $3.85 call for just over 7 cents – expiring 1/25/19 on 10% of my ’18 production.
What Does That Mean?
My Trade Thoughts And Rationale On 12/17/18
Since I still need to sell some of my remaining '18 corn, but I don’t want to sell $3.85 March futures, this trade allows me to try and get higher values than are available today. If the market stays sideways, I keep the 7 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:
On 12/17/18 when March corn was around $3.85, I sold a March $3.80 straddle (selling both a put and call) and collected just over 19 cents total on 10% of my 2018 production.
What Does This Mean?
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 has gone nowhere on 2/22/19, I'll profit similar to the trade above. With what I know today (12/21/18), I'll be happy to sell corn for $3.99. While downside risk is present with this trade, I’m not very concerned because end users seem to be buyers below $3.75. Harvest is over, the grain is stored, and historically there is usually a modest price recovery over the next couple of months.
Final Thoughts
For me the prolonged sideways market at unprofitable levels is making me consider trades I may not have in the past. The market has been trading sideways for a long time and looks like it will continue, so rather than waiting for a rally, I'm doing trades that according to one analyst have an 85% chance of collecting premium while still being willing to accept all possible outcomes if the market goes up, down or sideways.
I'm pleased to collect the 29 cents of premium from the first two trades. With this added premium, if the market goes down unexpectedly, I have some cushion to protect me from significant loss on the second two trades that are now in place. A rally would allow me to sell 20% of my 2018 production for an average price of $4.10 against the March futures, which with what I know today I would be happy to accept. Plus, if it rallies further, I have even more corn to sell to take advantage of a bigger rally. If the market does nothing, I generate some more premium to add to a later trade.
As long as I understand all possible outcomes, I'm comfortable considering alternative strategies with a PORTION of my production where I'm profitable when the market goes nowhere.
Want to read more by Jon Scheve? Check out these recent articles:
What I'm Doing With Some Of My Remaining Unsold 2018 Corn
Capturing Carry and Paying for Storage
Why I Think Buying Calls Is Gambling And Why I Avoid It
Jon Scheve
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387
Tel: 952-442-2380
Cell: 402-681-4867
Fax: 952-442-4945
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.
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