Jon Scheve with weekly market commentary made on January, 21, 2022
There is a big focus right now on Argentina’s weather and crop development. Half of their corn was planted early and damaged by the recent dry weather. The other half was planted in the last month and has been followed by some rain this past week, which has helped crop growth. Moving forward, Argentina’s weather in February will dictate price direction on futures until Brazil’s second corn crop takes center stage in April and May. Earlier this month a large bank issued a statement suggesting commodities (i.e., energy, metals, currency, livestock, and grains) were a good buy for this upcoming year. It seems that since early January a lot of money has been pushed into the market. This may be a big reason why the grain markets have been rallying so much so quickly. Market Action As I shared previously, I have been making straddle trades to help increase my price on some of my 2021 corn. In early August I placed 2 trades each on 10% of the 2021 production and collected 50 cents from the trade that expired in late October and 17 cents from the trade that expired in late November. Since these previous trades were profitable, and I wasn’t forced to make a sale on either, I replaced both with new straddle trades. Following details those results. January Straddle On October 15th when March corn was trading at $5.30, I sold a $5.30 January straddle (where I sell both the $5.30 put and the $5.30 call) and collected 38 cents of premium. I placed this trade on 10% of my 2021 production. The options on this trade would expire 12/23/21. What Does This 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, the sale would essentially be like selling $5.68.
If March corn is below $4.92 on 12/23/21 – No futures sale is made, and I would lose penny for penny for whatever value March corn 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 selling the straddle that I could add to a later trade. The closer the market is to $5.30 on that day, the more profit I keep because I will either have to buy back the $5.30 call or $5.30 put before options expiration.
What Happened? On 12/23/21 March corn was trading at $6.05, so as planned I let the call option execute as a sale at $5.30. With the 38 cents collected upfront, my final sale was $5.68. February Straddle On November 18th when March corn was trading at $5.85, I sold a $5.85 February straddle (where I sell both the $5.85 put and the $5.85 call) and collected over 46 cents. I placed this trade on 10% of my 2021 production. The options on this trade would expire 1/21/22. What Does This 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 be like selling $6.31.
If March corn is below $5.39 on 1/21/22 – No sale is made but, and I would lose penny for penny whatever 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 would get to keep some of the 46 cents of profit from selling the straddle that I could add to a later trade. The closer the market is to $5.85 on that day, the more profit I keep because I will either have to buy back the $5.85 call or $5.85 put before options expiration.
What Happened? On 1/21/22 March corn was trading at $6.15, so I bought back the $5.30 call for 30 cents and let the put options expire worthless. This left me with a 15-cent profit (over 46 cents collected – 30 cents to buy back the call – about 1 cent in commission). Final Thoughts on These Trades Collectively, I’m pleased with the combined results of these four straddle trades. I suspected the market could trade sideways from August through January, and I managed to collect additional premium without much added risk. In the end I only had to sell 10% of my production with never more than 20% of production at risk of being sold at values that I was satisfied with. And while I did sell 10% of my corn at $5.30, the collected premium from the four straddle trades combined during that period 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 off my hedge position, I can make more similar trades again if I wish. With this trade I’m left with only 50% of my 2021 corn futures position sold.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 firstname.lastname@example.org