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There is no question that the primary grain markets have seen a large down move. Solid planting seasons and good weather have contributed to significant sell-offs in Corn, Soybeans and Wheat. (See charts below.) As investors and traders watching these markets, it is only natural we seek opportunities to take risk for potential reward.

Corn Futures

December Corn – chart by OEC Trader

November Soybean Futures

November Soybeans – chart by OEC Trader

December Wheat Futures

December Wheat – chart by OEC Trader

Here are potential moves:

1) *Sell option credit spreads to strangle the market. Supply and demand factors have pushed the grain markets considerably lower. If you believe supply and demand have reached a better equilibrium and the market will trade in a range for a certain period of time, selling credit spreads may be a way to profit in a sideways market.

Theoretical Example: Sell 1 Dec Corn Call Spread / Sell 1 Dec Corn Put Spread

Leg 1: Buy 1 Dec Corn 4.25 Call (in descending order of strike price)

Leg 2: Sell 1 Dec Corn 4.00 Call

Leg 3: Sell 1 Dec Corn 3.50 Put

Leg 4: Buy 1 Dec Corn 3.25 Put ….….. (Dec Corn options expire 11/21)

(-) Maximum Risk – if Dec Corn goes above $4.25/bushel or below $3.25/bushel at the expiration, then you could sustain maximum losses. In either of those cases, your maximum loss is limited to the difference in strike prices of the options that are In-The-Money, less the premium you received for the “strangle” at the beginning. (Note: selling naked options has potentially unlimited risk.)

(+) Maximum Profit – if Dec Corn stays between $3.50/bushel and $4.25/bushel by option expiration, then you can keep all the premium received when establishing the “strangle.” You can NOT make any more profit than the initial premium received. As the time to expiration decreases, so does the mathematical probability of your options expiring In-The-Money. Options losing value over time is called “time decay.”

2) *Sell a covered put. You may believe the market has more room to fall. Better weather might increase supply and push prices down farther. But eventually you believe prices will be low enough to attract world demand and provide price support. Selling a covered put will help you maintain a net short position while taking advantage of time decay on an option.

Theoretical example: Sell 1 Nov Soybean futures / Sell 1 Nov Soybean 10.00 Put option

(Nov Soybean Options expire 10/24)

(-) Maximum Risk – if Nov Soybeans turns around into a bull market, you will lose on your short futures contract. A soybean futures contract is for 5000 bushels, so a one-cent move equates to $50 in your account. The premium you received from selling the Put Option will provide some relief by raising the break-even price on your short futures position. Ultimately, however, it will not reduce your over all risk. With any short position, there is technically unknown risk.

(+) Maximum Profit – if Nov Soybeans fall below your Put Option’s strike price at the time of expiration, your short Put option will be automatically exercised into a long futures position at the strike price. This will simultaneously offset your short futures position for a profit. In addition, you get to keep the premium you received for the Put option at the outset.

3) *Find a Commodity Trading Advisor with exposure to grains. The process of analyzing markets and choosing your trades can be frustrating and laborious, and that’s before you even take the risk of trading! Having your account managed by a CTA is another way to take the same risk but save yourself time to focus on other things. Call your BROKER and ask for a recommendation.

There are many ways to trade the markets. The above ideas are merely three and not necessarily recommendations. All trading involves risk. A thorough understanding of those risks is necessary before you place any trade. Give us a call to talk more about the opportunities in grains and other markets.

*Note: Transaction costs are a reality of trading, but have not been accounted for in these theoretical trade examples. Commissions have the effect of exacerbating losses and dampening gains. It is essential to know your commission rate whether you trade on your own or your account is managed by a CTA.

Option Disclaimer: Transactions in options carry a high degree of risk. Purchasers and sellers of options should familiarize themselves with the type of option (i.e., put or call) which they contemplate trading and the associated risk. Selling (“writing” or “shorting”) an option generally entails considerably greater risk than purchasing options. Naked options writing involves unlimited risk. Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of that amount. Option buyers should calculate the extent to which the value of the options must increase for a position to become profitable, taking into account the premium paid and all transaction costs.