February 7, 2017

This is a trade I think I will take for every year for the rest of my trading life…

My general opinion coming into 2017 has been, and is, that this year will ultimately be nothing but bullish for the USA’s main four row crops (Corn, Cotton, Soybeans and Wheat)…and for several months I have been looking at how to take those positions, pretty much coming to the conclusion (as I did last year as well) that the smart thing to do is simply buy summer dated calls in each one of them…and basically own all four markets as a single unit. Thereafter, by the math, I think it is safe to assume that if just one of these markets has a solid bull move, and the three others totally die, you could still come out with a net profit…And more optimistically, if 2,3 or all 4 had the types of moves that I am expecting, you obviously could be looking at substantial profits…Conversely, of course, if all four go wrong, you could lose every dollar you have invested.

But…Past experience has taught me that no matter how many times I present this sort of strategy, very few people ever buy it…with the question I most frequently get being, “Which one do you like the most?”, so I’ll just skip the idea of all four and go straight to the two that I think have the best odds, leverage and potential…

AND I FIRMLY RECOMMEND DOING BOTH OF THESE…AS DOING BOTH DOES, I BELIEVE, SHARPLY INCREASE THE ODDS FOR SUCCESS…I THINK BOTH ARE GOING TO FLY…WHICH GOES FIRST, AND WHICH GOES BIGGEST IS REALLY SOMETHING OF A COIN TOSS FOR ME…

 USING the 1 & 1 (absolutely)

I AM BUYING JULY 2017 SOYBEAN MEAL

The bottom line, as you will be able to CLEARLY see with the charts and table that follow, is that MUCH more often than not, Soybean Meal (feed for livestock) has what I would classify as a SIZEABLE rally, at some point, between now and the contract’s end in early July…And the “1 & 1” (units of 1 call and 1 put) is the perfect strategy to definitely increase the odds of catching that rally, when, and of course, if, it does occur…

What follows is every July Soybean Meal contract going back to 2000 (17 contracts) between January 1^st and expiration.

On each chart I have noted whatever rallies have taken place after mid-January…how big they were in Dollars, how big the move was in percentage terms, and the months in which the moves began and ended.

This market has a DECIDED tendency to put up a strong rally between now and summer…and the moves are often quite direct…and NOT small.

EVERY $1 MOVE IN SOYBEAN MEAL = $100 PER FUTURES CONTRACT – OR – EVERY $10 M0VE = $1000 PER FUTURES CONTRACT

So, note the size of the moves, when they began and ended…and how they actually did make the bull move…which, as previously noted, is often relatively straight up…

All charts in this study were created using Aspen Graphics

And yes, there are some big dollar moves here…which, aside from the high percentage number of years this market has had a strong rally, is one of the factors that definitely attracts me to this trade.

Here is a summation of what you see on those chart histories…And with today’s values for virtually all  commodities being notably higher than they were a decade ago, the most important statistic here is HOW BIG THE PERCENTAGE MOVE WAS IN EACH OF THESE CONTRACTS…

Rallies in July Soybean Meal Mid-Jan to Expiration

Since 2000, in 14 of those 17 years, July Soybean Meal has had at least a 26% rally between January and expiration, with the 3 exceptions being one year that only saw a 19% rally, one “dead” year, and one solid drift lower that still managed an 11% rally on the way down…

Considering the state of today’s futures markets, with billions in funds sloshing around on a daily basis…and the inherent volatility that seems to be the case in everything…MY OWN PERSPECTIVE IS THAT A 30% RALLY…FROM SOMEWHERE…SHOULD BE MY MINIMUM EXPECTATION. AND AT TODAY’S PRICES, THIS WOULD MEAN ABOUT A $100 RALLY, OR $10,000 PER FUTURES CONTRACT.

Why the 1 & 1 is perfect here…

To begin with, there is NO way to know if a rally is going to start from right here…or from $20-$30 or $40 lower…Nor is there any way to know exactly WHEN it might begin…And believe me, you are NOT going to figure out the timing by reading the news and thinking, “I’ll know when the bull move is starting and buy it then”. NO WAY. The point is, if it’s going on the upside, ANY up day can be the beginning…and although we know, from the charts above, that LARGE RALLIES DO SEEM TO OFTEN OCCUR BETWEEN NOW AND JULY…using the 1 & 1 does mean that if the first thing we see is a selloff, you DO have a great shot at being able to recoup your original investment by selling the puts…AND then start all over again at lower prices. PLAIN AND SIMPLE. And furthermore, if even then it continues to fall, which CAN be the case, you still will have the potential to reposition even lower…and BE THERE when/if this thing does do what it has done so many times.

SO YOU PUT THIS POSITION ON NOW, INTO THIS MOST RECENT PULLBACK…AND FOLLOW THE 1 & 1 RULES:

Rule 1 – If the market goes the wrong way, and reaches the point where you are able to recoup 100% of your total investment by selling both the put and the call, you do so automatically. You do not start thinking, “Let’s see if it will go further and I can make some money going the ‘wrong’ way”. You take the money and start over with totally new positions...at better price levels.

Rule 2 – Exactly the opposite of Rule 1. If the market does start going the right direction, you do everything you can to leave it alone…and let it RUN. Do NOT start thinking, “It’s gonna pull back. I’ll get out here and get back in at a better prices”.

As much as I value my own opinion, I have pointed out for years that the math and the statistics are much more important that any of the reasons anyone ever comes up with to either buy or sell a market…and I mean that…The numbers and how a trade can be worked are what counts…and these are GREAT numbers. This is a SOLID idea, and whether it’s weather (which we know is getting more erratic) or demand or geopolitics or whatever, there are plenty of reasons to expect this market to do what it has done so many times (and always for different reasons).

Here’s the big picture…

And here is what I would recommend here…

One thing you will definitely hear regarding this market (and all the other row crops) is “Supplies are too high for prices to rally.”…To which I will say for the 1000^th time…We virtually ALWAYS have record crops or big supplies…BECAUSE  WITH WORLD DEMAND CONSTANTLY SETTING NEW RECORDS, WE’D BETTER BE MAKING RECORD PRODUCTION…OTHERWISE, INSTEAD OF $10 SOYBEANS, WE’D BE LOOKING AT $50…I WOULD ALSO ADD, VIRTUALLY EVERY BULL MARKET I HAVE EVER SEEN STARTED WITH RECORD SUPPLIES…AND 95% OF ANALYSTS SAYING, “IT HAS NO UPSIDE POTENTIAL.”

This chart says it all I think…

 And Buy Wheat

 Yes...Wheat again…I was on this for a long time last year…and watched it rally 50 cents…then drop straight down almost $1.50…and stay there…to the extent that I was psychologically forced to pretty much give up on it for a while…But I am ready to go again…and NOT because I am some bullheaded commodity idiot who doesn’t want to admit he is wrong…And the fact is, last year I was dead, dead wrong about this market…But I assure you, being wrong last year has nothing to do with the present…During the past 36 years, I can promise you, at one time or another, I have been wrong AND right about every commodity market we trade…

One of the things I know about trading is that “Buying What Nobody Else Wants to Buy” is never a stupid move to make…No, it doesn’t mean that just blindly going against the crowd will result in success, but MANY of my winners have come from exactly that sort of situation…And I honestly cannot count the times I have seen markets that had innumerable fundamental reasons to stay down…And then six months later had blown the roof off.

And the truth is, Wheat has easily been the biggest dog among the four major row crops for the past year…and it IS the market that is almost unanimously described as “Too much of it in the world. No chance, AT ALL, for a rally.” And for this reason, and the fact that it at least appears to have traced out a potential bottom since last summer…AND THAT, JUST LIKE SOYBEANS, WHEAT DOES HAVE RECORD WORLD DEMAND…I am now cranking it up as a buyer again…and same as last year, think that a 2.00-$3.00 rally would be easy.

Here’s what it looks like…and what I am doing with it…And again, do NOT think that just because it didn’t go last year means that the same will be true in 2017…

The long term picture…

And what I am recommending right now…

Last year, one of our “hits” was in the Soybean Meal…and Wheat was NOT...I wouldn’t be putting these both out there again if I didn’t think they had major potential.

We have a USDA Crop report on Thursday…I think it’s a good idea to be on these markets ahead of that report…And that is where I personally am.

Give me a call if you are interested…

Thanks,

Bill

866-578-1001

770-425-7241

All option prices in this newsletter include all fees and commissions.

The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Soybean Meal, Wheat