Jon Scheve with weekly market commentary made on December, 10, 2022
The December USDA report is usually one of the least influential reports of the year, and this year was no different. The only change was a corn exports decrease due to limited movement this year so far. Corn carryout levels are still similar to the last two years, when corn eventually traded above $7.50 after harvest. Seasonally, corn usually starts trending higher after mid-December into January. Moving forward, weather in the southern third of Brazil and most of Argentina will be monitored closely, because dry conditions could reduce corn and bean yields over the next few weeks. Market Action On September 2nd, I suspected corn prices could likely be range bound or slightly lower throughout harvest, so I placed a trade to maximize some profit potential if that scenario happened. On 10% of my 2022 production, I sold a $6.50 December straddle (i.e., sold the $6.50 December put and the $6.50 December call) and bought a December $5.90 put. This allowed me to collect a net positive value of 62 cents. What Does This Mean? If the value of December corn on November 25th is:
Above $7.12 – I must sell futures at $6.50 but keep all of the 62 cents collected on the trade, so it would be like selling $7.12 futures.
Below $5.90 – I keep 2 cents of profit from the trade as the $5.90 put provides protection from downside loss of selling the $6.50 straddle.
Between $5.90 and $7.12 – I keep some of the 62-cent profit I collected to place the trade. Basically, I keep more of the 62 cents the closer December futures are to $6.50.
Why Did You Make This Trade? This trade seemed like a win-win-win. I would be happy selling a small portion of my crop above $7 and there was no downside risk in the trade of losing money if prices fell significantly. Plus, I could collect additional profits if the market continued to trade in a sideways pattern throughout harvest, which historically happens most of the time. What Was the Outcome? On November 21st, with only 3 days left of trading December options and corn at $6.57, I bought back the $6.50 straddle for 15 cents. I didn’t want either side of the options to get exercised, because I thought corn could increase a little by the end of the week since it was near the bottom of a 4-month trading range. After all commissions, I had a 45-cent net profit on the trade which I can apply to my final prices. Bottomline: Selling straddles in sideways markets can be a great way to increase profits. However, they need to be done carefully. One needs to be fully aware and willing to accept all final outcomes if prices go up, down, or sideways.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com