I am very much involved in several other markets, and intend to cover them early next week (maybe this weekend), but I put this together today and wanted to be sure to get it out ahead of next week’s trading…So this is nothing but August 2013 Soybeans…and a bit on Wheat.
July 12, 2013
The last chapter in Old Crop Soybeans…
STILL SHORT AUGUST 2013 SOYBEANS
This trade has beaten me up (and some of you) for many, many months now…to the extent, by now, a more intelligent trader might have thrown in the towel…BUT…I remain convinced the whole “there aren’t enough soybeans” story is going to culminate, within the next 30 days, in an outright collapse in cash and August Soybean futures prices. As I was saying last December regarding the Gold market, “there is no size sell off that would surprise me in the least”, and once again, this is precisely my current view of the Soybean market (old crop—last fall’s harvest---only). Maybe I am still dead, dead wrong but there IS no size decline in Soybeans that would surprise me between now and expiration of the August contract on August 14th.
I assure you, according to ALL the fundamentals and ALL the media rhetoric out there, there is really NO WAY this could happen. But, still, I believe it will. As ever, I will tell you that the values in every market we trade are more a function of perception and mob psychology than anything else…and part of this game is understanding one should always “expect the totally unexpected”. And with virtually 100% of the press suggesting “August prices can’t go down because farmers won’t sell”, I say, “We’ll see. I am staying short”, and I wouldn’t be doing so unless I believed the potential to be quite big. I don’t like looking stupid and I don’t like losing money.
Yes, the time left on this idea is short, but as I wrote in a self generated morale booster yesterday, “You have seen a 1000 markets make enormous downside moves in 30 days. They all start with one seemingly meaningless lower close…and then a month later traders are amazed at how big and virtually straight down the selloff has been”. Maybe that is not the case here. Maybe I’m wrong. Maybe this is a loser…But I’m taking the bet because I think it has major leverage and major potential…STILL.
July expired today at $15.63 a bushel. August, expiring in 32 days, closed at $14.29, or $1.34 under July. My guess is the average trader would think, “Sell August? It’s probably going up to where July went off. Shorting August is certain to lose money!”…Again, we’ll see. I’m staying short…and NOT just because I’m looking for everybody to be surprised. I think all the users (buyers) for August have long since been scared into buying…while there are still a ton of farmers (sellers) sitting on last year’s soybeans, thinking (amazingly) it will serve them to wait for even higher prices…and that they, for various reasons, will find themselves instead scared into selling them at unimaginably lower prices…in the hole.
Here are a few approaches I am using…And yes, none of these have a lot of time…AT ALL…which, as you can see on the charts following, means a small window in which to be right, but could also mean considerable leverage in options. But any way you take this trade, one thing is absolute: You will either win, lose (as much as 100% of what you put on the table) or draw within the next 2-4 weeks.
Basic at-the-money put option…
Or this one…slightly out of the money…
Here’s the 2 &1, which assumes this market will go definitively one way or the other during the next month…
August closed down 43 cents today…
And WAS today that first "meaningless" down day...the beginning of the "surprise" downside move? I have no idea but I do know TODAY'S 43 CENT DECLINE, relatively out of nowhere, certainly could be the start...And I am 100% going with it...I WAS SELLING AUGUST SOYBEANS TODAY AND I WILL CONTINUE TO DO SO AS/IF THEY CONTINUE TO FALL DURING THE NEXT FEW WEEKS. In other words, to me, every down day from here, according to the analytic masses, is NOT supposed to be happening…and every down day is, therefore, I believe, more of an indication something big IS happening…only it is exactly the opposite of what everybody is expecting (what’s new?).
Sell August – Buy November Soybeans
And here’s one more approach…If you don’t already understand spread trading, I’d just ignore this…This involves futures contracts only, which can mean unlimited risks…but I do see these two contracts’ prices as being absurdly out of line in respect to each other, which the markets will perhaps dramatically “correct” in the next month…I like the trade, because, firstly, I think this WILL happen, and secondly, because the risk is fairly well defined. More specifically, you get out if it makes new highs (see chart).
As the perception begins to sink in, as it already may have begun to in the past few days, that we are NOT going to run out of soybeans in the next 30 days, I believe the price difference between August and November will close sharply. At today's close, August ($14.29) was $1.72 over November ($12.57). I can EASILY see that gap falling to 50 cents before August expires...or as much as $6000 per spread from here. My recommendation is to sell this spread Monday, and exit if it makes it back to 200, the risk then being about 30 cents, or $1500 on the big contract, and $300 on the mini.
So that’s it…except to say, with July 2013 Corn having expired today, I am no longer short Old Crop Corn…which never worked.
I have done some research on New Crop Corn and New Crop Soybeans (both in the ground now) which I hope to have out in a few days. In a word, while I have been quite bearish old crop in both Corn and Soybeans, I have no immediate interest in being short either of these markets that have yet to be made, much less harvested.
I AM, HOWEVER, STILL VERY STRONGLY RECOMMENDING THE SHORT SIDE OF WHEAT…IN FACT, I WANT TO BE SHORT WHEAT EVERY BIT AS MUCH AS I WANT TO BE SHORT AUGUST SOYBEANS.
Here’s a quick chart with one option I like here…
For what it’s worth, I see a whole bunch of people talking about a “seasonal bottom” in Wheat. My overwhelming experience has been, “if you can find ANYBODY calling for a bottom, it usually ain’t”. I essentially think this market is headed for somewhere under $5.00 in the next 3-6 months.
Give me a call if anything here interests you…
I work out of a home office so it is ok to call nights or weekends …especially if you are a farmer as I know you guys don’t have time to stop during the day and call some dumb commodity broker.
The author of this piece currently trades for his own account and has financial interests in the following derivative products mentioned within: Soybeans, Wheat