How a Limited Market Left Me Selling Above Current Market Value – Ohio Ag Net
By Jon Scheve, Superior Feed Ingredients, LLC
The focus is currently on the weather and crop development in Argentina. Half of their corn was planted early and damaged by recent dry weather. The other half was planted last month and was followed by some rains last week which helped crop growth. Moving forward, the weather in Argentina in February will determine the direction of futures prices until the second corn crop is in central Brazil in April and May.
Earlier this month a major bank released a statement suggesting commodities (ie energy, metals, currency, livestock and grains) were a good buy for the coming year. It seems that since the beginning of January a lot of money has been injected into the market. This may be one of the main reasons grain markets have recovered so quickly.
As I shared previously, I have been doing straddle trades to help raise the price of some of my 2021 corn. In early August, I placed 2 trades each on 10% of the 2021 production and I collected 50 cents on the transaction that expired at the end of October and 17 cents on the transaction that expired at the end of November.
Since these previous trades were profitable and I didn’t have to make a sell on either one, I replaced both with new straddle trades. Following details these results.
On October 15 when March corn was trading at $5.30, I sold a January $5.30 straddle (where I both sell the $5.30 and put the $5.30 call) and collected 38 cents in bounty. I put this trade on 10% of my 2021 production. Options on this trade would expire 12/23/21.
What does it mean?
- If March corn is above $5.68 on 12/23/21, I would let this option execute, giving me a short futures position of $5.30. With the 38 cents I collected, selling would essentially amount to selling $5.68.
- If March Corn is below $4.92 on 12/23/21 no futures sale is made, and I would lose pennies for any value of March Corn that is below $4.92.
- If March Corn is between $4.92 and $5.68 on 12/23/21 no sale is made, but I would get to keep some of the 38 cents of profit from the straddle sale that I might add to a job later. The closer the market is to $5.30 that day, the more profit I keep because I will either have to buy back the $5.30 or $5.30 call put before the options expire.
On 12/23/21, corn was trading at $6.05, so as expected, I let the call option execute as a sell at $5.30. With the 38 cents collected upfront, my final sale was $5.68.
On Nov 18 when March corn was trading at $5.85, I sold it a $5.85 February straddle (where I both sell the $5.85 and put the $5.85 call) and raised over 46 cents. I placed this trade on 10% of my 2021 production. Options on this trade would expire on 01/21/22.
What does it mean?
- If March Corn is above $6.31 on 1/21/22, I would let this option execute, giving me a short futures position of $5.85. With the 46 cents I collected, the final sale would essentially amount to selling $6.31.
- If March corn is below $5.39 on 1/21/22 no sale is made and I would lose penny for penny regardless of the difference between the value of March corn is below $5.39.
- If March corn is between $5.39 and $6.31 on 1/21/22, no sale is made, but I might keep some of the 46 cents profit from the straddle sale that I might add to a subsequent transaction. The closer the market is to $5.85 that day, the more profit I keep because I will either have to repurchase the $5.85 or $5.85 call before selling the options expiration.
On 1/21/22, corn was trading at $6.15, so I bought back the $5.85 call for 30 cents and let the puts expire worthless. That left me with a profit of 15 cents (over 46 cents collected – 30 cents to redeem the call – about 1 cent in commission).
Final thoughts on these trades
Collectively, I am satisfied with the combined results of these four straddle businesses. I suspected that the market might trade sideways from August to January, and I managed to collect extra premium without much added risk. In the end, I was only to sell 10% of my production with never more than 20% of production likely to be sold at values that I was happy with. And while I sold 10% of my corn at $5.30, the premium collected from the four straddle trades combined during that time totaled $1.20 (50 cents, 17 cents, 38 cents, and 15 cents) . Therefore, in the end my sale was actually $6.50 on 10% of my production.
Now that both trades are from my hedge position, I can make similar trades again if I wish.
With this trade, I am only left with 50% of my 2021 corn futures position sold.
Please email [email protected] for any questions or to find out more. Jon grew up growing corn and soybeans on a farm near Beatrice, NE. After graduating from the University of Nebraska at Lincoln, he became a grain trader and has been trading corn, soybeans and other grains for 18 years, building relationships with end users in the process. After successfully marketing his father’s grain and earning his MBA 10 years ago, he began helping farmer clients market their grain based on his principles of farmer education, reducing risk, by understanding the storage potential and using a grassroots strategy to maximize profits for individual farms. A big believer in educating farmers in futures trading, Jon writes a weekly commentary for farmers interested in learning more and growing their farming business.
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