This week the markets dropped due to concerns over the new covid variant throughout the world. Wheat, beans, crude oil, and the stock market opened lower and didn’t rebound throughout Friday’s trading session. On the other hand, corn, oats, and spring wheat started lower but rebounded higher during the shortened trading day.
Until more is known about the new strain’s effects, how it spreads, and if current vaccines offer protection, market direction is unknown.
Market Action
In early August after watching the market swing between $6 and $5 throughout July, I was uncertain of market direction from August through November. I thought if corn was at or above $6 once harvest was over, it would be a good price to start selling more of my 2021 crop. However, at that time it seemed like a sideways corn market through November was the most likely outcome.
Therefore, on 8/2/21 when December corn was trading $5.45, and before the August USDA yield estimate was released, I made the following 2 straddle trades.
November Straddle
On 10% of my anticipated 2021 production, I sold a $5.30 November straddle (where I sell both the $5.30 put and the $5.30 call) and bought a $4.70 put and collected 62 cents or premium. The options on this trade would expire 10/22/21.
What Does This Mean?
If Dec corn is above $5.92 on 10/22/21 – I would let this option execute, giving me a short futures position of $5.30. With the 62 cents I collected, the final sale would essentially be like selling $5.92.
If Dec corn is below $4.70 on 10/22/21 – No sale is made, but I would make 2 cents on the trade, because the $4.70 put purchased with the straddle offsets the short put position I would get executed on from selling the $5.30 straddle. Basically, the 2 cents of profit from the trade would offset my commissions and I would have no profit or loss on the trade.
If Dec corn is between $4.70 and $5.92 on 10/22/21 – No sale is made, but I would get to keep some of the 62 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 10/22/21 Dec corn was trading $5.38, so I bought back the $5.30 call back for 8 cents, and let the other options expire worthless. This left a 50-cent net profit on the trade (62 cents collected – 8 cents to buy back the call – 2 cents commission).
December Straddle
When I sold the November straddle above, I also sold a $5.30 Dec straddle (where I sell both the $5.30 put and the $5.30 call) and bought a $4.60 put, collecting another 72 cents. This was also on another 10% of my anticipated 2021 production. The options on this trade would expire 11/26/21.
What Does This Mean?
If Dec corn is above $6.02 on 11/26/21 – I would let this option execute, giving me a short futures position of $5.30. With the 72 cents I collected, the final sale would essentially be like selling $6.02.
If Dec corn is below $4.60 on 11/26/21 – No sale is made but, I would make 2 cents on the trade, because the $4.60 put purchased with the straddle offsets the short put position I would get executed on from selling the $5.30 straddle. Basically, the 2 cents offsets my commissions and I have no profit or loss on the trade.
If Dec corn is between $4.60 and $6.02 on 11/26/21 – No sale is made but, I would get to keep some of the 72 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 11/26/21 Dec corn was trading $5.83, so I bought back the $5.30 call for 53 cents and let the other options expire worthless. This left me with a 17-cent profit (72 cents collected – 53 cents to buy back the call – 2 cents commission). Final Thoughts on These Trades I’m pleased with the results of these trades for several reasons. One, I managed to collect additional premium while the market stayed in a sideways pattern, which historically happens most often during late harvest. Two, since I was unsure of market direction, I protected myself against multiple unknown events by having puts to the downside on these trades. And finally, it could have allowed me to sell near the top of the recent price range should the market have rallied as harvest was ending. Now that both trades are off my hedge position, I’m free to make more of the same types of trades again if I wish. I will add these additional profits to an upcoming trade or a sale that I will eventually make on this crop in the future.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com