Jon Scheve with weekly market commentary made on December, 23, 2022
The market is in “holiday mode” with light trading, the weather in Brazil and Argentina is being monitored closely. Any dry conditions could further reduce corn and bean yields over the next few weeks. Market Action On October 3rd when corn was trading at $6.85, I suspected corn prices would likely be range bound or slightly higher after harvest was finished. Therefore, I placed a trade to maximize some profit potential if that happened. On 10% of my 2022 production, I sold a $6.85 January straddle (i.e., sold both the $6.85 January put and the $6.85 January call which are based upon March futures). This allowed me to collect a net positive value of 68 cents. What Does This Mean? If the value of March corn on December 23rd is:
Above $7.53 – I must sell futures at $6.85 but keep all the 68 cents collected on the trade, so it would be like selling $7.53 futures.
Below $6.17 – I give back all of the 68 cents initially collected from the trade, and I start to lose on this trade penny for penny below this value.
Between $6.17 and $7.53 – I keep some of the 68-cent profit I collected to place the trade. The closer the price is to $6.85, the more I keep.
Why Did You Make This Trade? I was comfortable with all potential outcomes.
Prices go up - I would have been happy selling 10% of my crop above $7.50.
Prices go down - Based on early yield reports, it seemed unlikely corn would trade to the lower end of the range, and because it was only on 10% of production downside risk seemed limited.
Prices stay sideways - I would collect additional profits, which historically seemed the most likely scenario.
What Happened? On December 23rd, when corn was $6.67 and the options were about to expire, I bought back the $6.85 put for just under 20 cents because I did not want it to execute and give me a long position in my hedge account. I did not buy the call back because it was very likely that it would expire worthless at the end of the day because the market was well under the $6.85 strike price as well as saving me commission on that portion of the trade. After all commissions, I made about a 48-cent profit on the trade (i.e., the 68 cents originally collected less the 20-cent cost to buy back the put), which I can apply to my final prices. Bottomline: This is the second straddle I collected over a 45-cent profit on in the last month on 10% of my production. While these examples illustrate how selling straddles in sideways markets can be a great way to increase profits, they need to 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 type of trades.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com