Trade Strategy ahead of USDA Report - Allendale Estimates on Balance Sheet
Below is a press release with Allendale’s estimates for the next
USDA report.
Things could get very ugly if we see a carryout number close to
where Allendale has it pegged at
Don’t be afraid to get some protection ahead of the report that
is out May 10th
My thoughts are that we should see 5.00 area on the board hold
as support until the point that the market feels like the corn is actually
going to be there; if Allendale is right and we see a 2 billion bushel carryout
or higher many have targets for corn starting with a 3 on the board; one that
we regularly follow has a 3.50 target…………..as mentioned I am not that bearish
and I think we have a long way before knowing that the crop is made but still
the risk is out there and we need to keep in mind that USDA is king as to
moving the prices; so it is very possible that we see bearish numbers that
leave many unsold and un protected
For those that are undersold for new crop and wouldn’t be
against selling some at 6.00 on the dec board here is a trade that would
protect should things fall out of bed between now and July 4th;
It is a trade that I wouldn’t hold after July 4th
because of how time value tends to work and depreciate against one
The trade is selling a 6.00 Dec call; which now becomes the max
you get for your corn;
Then selling a 5.00 put and using finance of the short call and
short 5.00 put to buy a multiple of 4.00 Dec corn puts (aprox 14)
Here is the trade on a graph; it shows that a steady market to
slightly up market the trade doesn’t cost you anything by July 4th;
at expiration the max you can get for your corn is 6.00; but likely one pulls
off this trade right after or before July 4th and replaces with a
sale or opens the top side back up
If we lose a dollar between now and July 4th ish the
trade should net you over 5,900 or about 1.18 a bushel in protection.
The key with buying multiple puts is not to get stuck in the
range where one sold the 1 put and the area where you bought multiple so this
trade is designed to exit either right before the June 30th report
or shortly after because the risk in between the strike levels used
The short call should be treated like always when selling
covered options; some of you that might mean just making a sale when option
expires; others might want to buy back if you can at 25% or less of what you
sold for; some might risk it to double what you sell it for. (keep in
mind that the short call gives you margin requirements and possible margin
calls and carries unlimited risk)
Here is the mentioned graph
The redline shows the expected what if 64 days from now or July
6th; the green line is at expiration which I wouldn’t recommend at
all for this strategy ; it is a plan to prevent against a train wreck
where we see acres go up or carryout numbers huge like the Allendale press
release below
This first screen shot shows 5.80 down to 2.80 red line is July
6th
This next screen shot is for July 6th; but it shows
the market if we go up or stay the same; where the strategy would cost you
about 1400; but in a sideways to slightly up market one might hold this trade
longer with proper risk management as net cost is 0 at expiration if Dec corn
stays between 5.00-6.00 on the futures; presently at 5.30
It also shows the unlimited risk in an up market; but if this is
a hedge the cash should be sold and that should off set the hedge loss
To recap
The thoughts are to place above trade; exiting around July 4th
in a down hard market; and holding re-evaluating the trade in a sideways to
slightly higher market (probably lifting the short put at that time)
Bottom line is with the risk out there some sort of marketing
plan is advised that helps one lock in profits while keeping a little upside
open; the above is just one thought out of thousands of possibilities; if you
want to discuss any please give me a call. Some might want to just look
at doing something simple like buying the cheap out of the money puts for
comfort.
As always keep in mind that futures and options are risky and not
suitable for everyone.
Jeremey Frost
Grain Merchandiser
Midwest Cooperatives
800-658-5535
800-658-3670
605-295-3100 (cell)
605-258-2166 (fax)
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There is a risk of loss when trading commodity futures or options.
From: Allendale, Inc. [mailto:gmcbride@allendale-inc.com]
Sent: Thursday, May 03, 2012 7:45 AM
To: CO-Pierre, Jeremey Frost
Subject: May 2012 Supply & Demand Estimates
Sent: Thursday, May 03, 2012 7:45 AM
To: CO-Pierre, Jeremey Frost
Subject: May 2012 Supply & Demand Estimates
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