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Benefiting from puts, calls and straddles

first_imgShare Facebook Twitter Google + LinkedIn Pinterest CornThe market continues to be uneventful. End users want to buy $3.40 Dec futures and farmers are hoping for $3.60 to sell some excess production. Slow exports aren’t helping. Realistically farmers may need to plant 1 million to 2 million fewer acres next year to see $4 by next summer. BeansWith bean harvest nearly over, farmers are hoping for reduced market pressure, which might allow for a small rally. Export pace has also been slow for beans. Unlike corn though, demand growth for beans has been increasing year over year at great rates, which could support 1 million to 2 million more bean acres next year. In fact, 2018 may be the first year in over 30 years where bean acres exceed corn. For this to happen though, prices will need to exceed $10.25 at some point before April on the Nov ’18 while Dec ‘18 corn stays below $4.Once the U.S. bean harvest is complete, prices will be heavily driven by South American weather where nearly 60% of the world’s bean production is grown. Benefiting from selling callsI’ve read “advice” from “experts” recently about option volatility being at a 10 year low and that it is a GREAT time to buy “cheap” options. These experts state they wouldn’t dream of selling options right now. This may be good advice for a speculator, but I’m not a speculator, I’m a farmer. And usually, a trade that is good for speculators isn’t always a good trade for a farmer. That is because a farmer will always have more crops to sell in future years. This is why I view buying calls as an unnecessary risk for farmers.Recently I have had some opportunities to SELL calls during this low volatility period. Selling calls can allow me more flexibility and opportunities to pick up extra premium when prices are below breakeven points. For instance, in the last two months I’ve collected 30 cents of premium on 10% of my production (8 cents back in Sep and 22 cents in Oct see trades below). I still have another call working next month where I could pick up an additional 10 cents. Even with a corn rally over the next month I may have to sell Dec futures at $3.60. If I have to sell at $3.60 because of a short call position, I’ll still pick up a total of 40 cents in premiums, which means I’m really selling at $4 against the Dec. Then I can move that sale from Dec futures to July futures, picking up another 30 cents of market carry and suddenly I’m selling 10% of my production at $4.30, which is at profitable levels and much better than any prices I’m seeing today. Following provides the trade detail. Sold call: CornOn 8/24/17 (Dec corn was $3.55), I sold a Nov $3.55 call on 10% of my production for 11 cents. What does this mean?If Dec corn is above $3.55 on 10/27 I have to sell corn for $3.55 and keep the 11 cents ($3.66 total). If Dec corn is below $3.55 on 10/27 I keep the 11 cents to use on another trade in the future. What happened?Corn closed at $3.48, so the options expired worthless. I keep all the premium from the trade that I will add to a future trade. Straddle: CornOn 9/19/17 I sold a Nov $3.55 straddle for 17 cents (I sold the $3.55 put and the $3.55 call and collected a total of 17 cents) on 10% of production.Trade Expiration – 10/27/17Expected Market Direction for the next month — The market will likely find a bottom and bounce off of it.Potential Benefit — If Dec futures close at $3.55 on 10/27, I keep the 17 cent premium.Potential Concern — Reduced or no premium if the market moves significantly in either direction. Every penny higher than $3.55 I get less premium until $3.72. At $3.72 or higher I have to make a corn sale at $3.72 against Dec futures. At $3.38 or lower a new crop corn sale is removed, but any profits gained on that trade can be added to a future sale.What happened?When corn was near $3.50 on Friday, I bought just the put portion of the trade back for 6 cents (after commission) and let the call expire worthless. I netted out 11 cents (17 – 6) on this trade that I will keep and add to a future trade. Selling a put on my beansLate last year I sold a bean put that allowed me upside potential with downside protection on 20% of my ‘17 production. Sold call/Purchased putOn 12/14/16 with beans around $10.15, I purchased a Nov $10 put for 55 cents and sold a Nov $11 call for 35 cents (20 cent net cost). What does this mean?If on October 10/27/17 beans are trading:Above $11 – I have $11 maximum or ceiling price (less 20 cents) = $10.80Between $10-$11 – I can set my price wherever the market is (less 20 cents)Below $10 – I have $10 floor price (less the 20 cents) = $9.80. What happened?Beans closed at $9.75, so the call options expired worthless and the puts got exercised. Thus I made a sale on Nov soybeans at $10 less the 20 cents = $9.80 net on the trade. Looking back, this trade ended up giving me 5 more cents than if I had done nothing. I’m not disappointed in this trade because it ultimately did what it was supposed to do — it gave me upside potential with downside protection. I could see where another farmer might be frustrated. Sometimes farmers get upset when they trade several options, but in the end they don’t have much to show for it, maybe only a minor profit or worse a loss. But that is usually because of hindsight bias. The key to not being frustrated is to make sure you outline all the possible scenarios for each trade to make sure you are comfortable with all potential outcomes and not just the ones you were hoping for. Bean straddle — New tradeWhile I make sure to understand all possible scenarios when I make my trades, my grain marketing goal is to try to squeeze as much profit and premium out of the market that I possibly can while minimizing and reducing risk. That’s why I added another trade to the previous one above. Following are the details. New bean trade — StraddleKnowing the above put options would get executed, I sold a straddle against it. On 10/27/17 when Jan futures were $9.85, I sold a $10.20 straddle for 45 cents (sold the $10.20 put and the $10.20 call and collected 45 cents) against 20% of my ’17 production. Trade Expiration – 12/22/17Expected market direction for the next two months: The market will likely find a bottom and bounce off of it due to South American weather concerns.Potential benefit – If Jan futures close at $10.20 on 12/22/17, I keep the 45-cent premium.Potential concern — Reduced or no premium if the market moves significantly in either direction. For every penny lower than $10.20 I get less premium until $9.75. At $9.75 or lower, the $9.80 sale above that I just made from the put will be wiped away, but any profits gained on that trade and from market carry will still remain, which probably will be at most a 15-cent profit. For every penny higher than $10.20 I get less premium until $10.65 At $10.65 or higher I have to make a bean sale at $10.65 against Jan futures.Right now, I’m 100% priced for my ’17 bean crop. Any additional futures sales will need to be moved to ‘18 production. There is some concern with spreads between ’17 and ’18 crop, i.e. a sudden $1 per bushel rally due to South American production issues. However in past years when this has happened, it’s been manageable with less than a 50-cent inverse. With no ’18 sales in place yet, a potential inverse could mean opportunities at selling next year’s crop at much more than $10 per bushel. In other words, I’ve weighed all my risks and potential benefits and I’m comfortable with all potential outcomes. Selling puts OR buying calls is speculative in natureSelling puts as a grain producer is a speculative trade, just like buying calls. In both cases it requires farmers, who always have more grain to sell, to buy MORE grain. This doesn’t make any sense to me and I feel it exposes farmers to additional unnecessary risk.While I would never completely rule out a possible trade option that could make me long grain, I would be careful to never sell a put that I don’t already have a sale in place against it first. I also never sell a put without selling a call against it to help offset some of my risk of prices going down. In the very rare occasion when I would consider the re-ownership of grain, there would have to be a clear value to do so and even then I would have a clear limit to how much I would do. I typically will do less than 33% of my production on a trade like that.Many people like to speculate and gamble. And, that’s ok. In fact most farmers have the mindset that prices will go up no matter what, regardless of the price on any given day. And to their credit, there is always an expert out there telling them what they want to hear and the reasons why the market will rally. But, prices don’t always go up, especially when we want or need them to. That’s why I consider all possible market scenarios (up, down and sideways) with each trade. Up markets are relatively easy to manage, and even sideways markets have potential opportunities. It’s when the market goes down that I get concerned along with every other farmer. But, just because I plan for sideways and down markets, doesn’t mean I’m hoping they happen. I’m just spreading out my risk and maximizing all of my opportunities. Remember, hope is not a marketing strategy. Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at [email protected]last_img

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