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Which Wheat Put to Buy? Tech Guy's Opening Calls. 04/07/2022

May Wheat: Steady to 1 higher

May Corn: Stedy to 1 higher

May Beans: 1 to 3 lower


Tech Guy’s Comments:

Corn and beans continued to show strength today. The $7.00 area in December corn held as expected. I look for continued strength moving forward overall.

May crude oil: the 30-minute chart below depicts the declining wedge formed over the last 7 trading days in the context of a larger horizontal line (red) which is across the March 15th low of $93.54, which is a support level. The low for May crude oil today was $93.81; it settled at $96.03!

Over the last 24 hours, an expanding triangle formed with 3 swing lows and the 3rd one poking down a bit more. The big spec fund buyers were buying a big volume of contracts in this area. Most all of the funds trade using technical analysis to guide them. They would not allow the May crude price to trade to $93.54.

I look for price to test the $99 area above and probably continue up to the $102 to $104 area. The odds favor price strength through the end of May.

Please take some time to study the crude chart. It is good stuff.


About Which Put Option to Buy...

From a client:

I am curious what strike price you would recommend. 75-$1.00 premium (per bushel) can add up quick!

Note: premium is the value (cost to buy & value to sell) each bushel of an option; one option is 5,000 bushels.

The margin for a CBOT wheat futures is $5610, which is $1.12 per bushel, so let's start with that.

Clearly, if the market goes down, one will make more money with a futures contract than an option, but with a lot more risk.

Just as clearly, if one pays $1 for a put option, the option will make a lot more money sooner than a 30 cent out-of-the-money put.

Many farmers like the buying a put option that takes about as much money as the futures margin. The expensive put makes more money with a little down move and a lot of money with a big down move with no worry of a margin call.

Consideration needs to be given to how far one expects the futures price to decline.

September wheat settled today at $10.30.

Note: Delta of an option is the percent of price change for that option relative to the price change of the underlying futures contract.

If an option's delta is 0.4, that means for every 10 cents the futures moves, that option's value will change four cents. As the futures price declines, the delta of all puts increases.

At the close today, the September $10.30 put is $1.08, delta .52

The $10.00 put is 91 cents, delta .48

The $9.70 put is 75 cents, delta .44

The $9.40 put is 60 cents, delta .39

The $9.10 put is 48 cents, delta .35

The $8.80 put is 38 cents, delta .31

The $8.50 put is 29 cents, delta .20

The $8.20 put is 22 cents, delta .19

The $7.90 put is 16 cents, delta .19

Note: all of the following groups of options would take about the same amount of money to buy:

One $10.30 put

Two $9.10 puts

Five $7.90 puts

If, on expiration day, wheat is down $1.30 to $9.00:

One $10.30 put will net 22 cents

Two $9.10 puts will lose a net 66 cents

All others will be a 100% loss

If wheat goes down $3.30 to $7.00 on expiration:

One $10.30 put will net $2.22

Two $9.10 puts will net $3.24

Five $7.90 puts will net $3.70

If wheat goes down $4.30 to $6.00 on expiration:

One $10.30 put will net $3.22

Two $9.10 puts will net $5.50

Five $7.90 puts will net $8.70

Any group of these puts will increase in value more than $1 if wheat futures declines $1 in the next two months.

We expect September wheat to trade at least $2 lower by June first and maybe be a lot sooner than that. Weather and war; war and weather.

The seasonal trend on wheat is down into August.

September CBOT options expire August 26th this year.

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