Jon Scheve with weekly market commentary made on December 8, 2023
The December USDA report is arguably the least important of the 15 reports released during the year. This year was no exception as there were no major changes announced in the report.
The market will now focus on the weather in South America as the soybeans there enter the critical stages of crop development for the next 6 weeks. This will also coincide with the time of year when soybean export pace out of the US should be at its highest for the marketing year.
Market Action – 3 Sold Corn Calls
Last week I shared how I bought December puts that allowed me to keep a $5.37 floor price AND unlimited upside price potential through November for most of my 2023 corn crop.
The following now details how I increased my final average sold price with additional option trades.
Sold Call #1
My saddle strategy, as I have shared in the past, for the 2023 crop provided additional profit during a mostly sideways market throughout early summer. However, by mid-September I was concerned December futures could drift lower as harvest progressed.
Therefore, on September 18th, when December corn was trading $4.70, I placed a trade to maximize profit potential if prices stayed sideways or went lower. I sold a $4.70 December call for 18 cents on 10% of my 2023 production.
What Does This Mean?
If the value of December corn on November 24th is:
Above $4.88 – I sell futures at $4.70, but I keep all the 18 cents collected on the trade, so it would be like selling $4.88 futures.
Below $4.70 – I keep all the 18 cents and I have nothing additional sold.
Between $4.70 and $4.88 – I keep some of the 18-cent profit I collected when I placed the trade. The closer the price is to $4.70, the more I keep, but nothing additional is sold.
Why Did You Make This Trade?
In mid-September, I was comfortable with all potential outcomes.
Prices go up - I would be happy selling 10% of my crop at $4.88.
Prices go down – I keep additional profit from the trade.
Sold Call #2
A week later corn rallied slightly. However, the reports I was getting from producers throughout the US suggested the national yield would likely improve. More and more $5.00 December corn seemed unlikely.
Therefore, on September 25, when December corn was trading at $4.80, I placed a trade to maximize some profit potential if the market stayed sideways or went lower. On 10% of my 2023 production, I sold a $4.80 December call for over 13 cents.
What Does This Mean?
If the value of December corn on November 24th is:
Above $4.93 – I sell futures at $4.80, but I keep all the 13 cents collected on the trade, so it would be like selling $4.93 futures.
Below $4.80 – I keep all the 13 cents and I have nothing additional sold.
Between $4.80 and $4.93 – I keep some of the 13-cent profit I collected when I placed the trade. The closer the price is to $4.80, the more I keep from the trade, but nothing additional is sold.
Why Did You Make This Trade?
At the end of September, I was comfortable with all potential outcomes.
Prices go up - I would be happy selling 10% of my crop at $4.93.
Prices go down – I keep the profit from the trade.
Sold Call #3
A month later corn rallied to $5 and then retreated quickly. Reports were still suggesting yields would be higher than USDA estimates. Since corn failed to sustain values above $5, I thought it was unlikely December corn would trade above $5 again.
Therefore, on October 31st when December corn was trading at $4.80, I placed a trade to maximize some profit potential if the market stayed sideways or went lower. On 10% of my 2023 production, I sold a $4.85 December call for over 6 cents.
What Does This Mean?
If the value of December corn on November 24th is:
Above $4.91 – I sell futures at $4.85, but I keep all the 6 cents collected on the trade, so it would be like selling $4.91 futures.
Below $4.85 – I keep all the 6 cents and I have nothing additional sold.
Between $4.85 and $4.91 – I keep some of the 6-cent profit I collected when I placed the trade. The closer the price is to $4.85, the more I keep from the trade.
Why Did You Make This Trade?
At the end of October, I was comfortable with all potential outcomes.
Prices go up - I would be happy selling 10% of my crop at $4.91.
Prices go down – I keep the profit from the trade.
What Happened with All the Trades?
On November 24th December corn was trading $4.68, which was below all the strike prices outlined in the trades above. This meant all my sold call options expired worthless, no additional sales were made, and I got to keep all the profits from each trade. The total profit was 37 cents on 10% of my corn or 3.7 cents on 100% of my 2023 corn.
Bottomline:
If you combine these three trades with my other straddle and call trades this year, I made $1.76 per bushel profit on 10% of my 2023 production, or over 17 cents on 100% of my production after commissions. This increases my sold value of $5.37 to $5.54 against the December contract.
I do not plan to make any additional options trades (calls or straddles) on my remaining 2023 corn crop as I am now 100% priced, so the only thing left to do is roll the sales forward to capture carry and set basis.
These trade examples illustrate how selling options can be a great way to increase profits. However, they must be done carefully. Farmers need to fully understand and be willing to accept all potential final outcomes if prices go up, down, or sideways before placing these types of trades.
For example, with futures decreasing over the last several months, very little of my crop was getting sold with these trades. Since I had my downside protected with puts, as described last week, I was ok if prices did not rally, but these kinds of things need to be considered. Options trades are not perfect and do not work every time, but this is the second year in a row where I am very glad I had a strategy in place for a sideways trading market.
Next week I will discuss how I captured market carry on top of this final price against the December futures and what that means for the value of my 2023 crop now.
I help many farmers understand how to do these types of options trades to better increase their profits. Reach out to me to discuss opportunities for your farm operation.
Jon Scheve
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387
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