July 15, 2013
History argues for something big in
December 2013 Corn and November 2013 Soybeans
If you are like me, you hate having to work your way through columns of numbers but I think walking your way through the two following 10 year histories will be worth your time and effort.
The point I’m specifically addressing here is the historical tendency for both December Corn and November Soybeans to make fairly sizeable moves, one way or the other, between exactly now and expiration of their respective contracts.
I am then taking those minimum historical percentage gains or losses and applying current options prices to what might be the potential using several different BOTH WAYS STRATEGIES. The possibilities I get are, to say the very least, quite interesting.
See for yourself…
On the two tables following, I have noted where both markets were as of mid-July during the last 10 years, then noted how much above and how much below that price they traded before expiring in the fall…I have then highlighted whichever direction had the greatest move, not with the idea of drawing any conclusion as to which direction had the greatest probability, but simply to note what might be the smallest move to expect out of either market.
Start with the Corn…
December Corn Between Mid-July and Expiration Last 10 Years
In other words, Corn moved at least 20% in 9 of the last 10 years. With December Corn currently trading about $5.00, this implies the possibility of minimally seeing December trade either $4.00 or $6.00 before it goes off the board…which I’ll get to later.
And here are the Soybeans…
November Soybeans Between Mid-July and Expiration Last 10 Years
In Soybeans, the lowest percentage move is more like 15%, which, with November currently about $12.50, implies the possibility of minimally seeing November trade either $10.62 or $14.37 before it goes off the board…
I obviously have to clearly state that just because these percentage moves have taken place for the past 10 years (and beyond, really), does NOT mean you can blindly expect the same to happen this year…But they certainly do suggest that options approaches based on nothing more than the opinion BOTH MARKETS WILL MOVE is not a bad trading perspective to be taking…
3 approaches to the December Corn contract
I am writing this mid-day and all of these numbers are based on prices as of the moment I create each chart. As today’s market closes may be different, the precise dollar values may be different as well…but the basic strategies and overall position costs should be fairly much the same…
possibility-No opinion other than “It should move at least 20%, one way or the
HERE IS A BEARISH STRATEGY using the same expectation of at least a 20% move, one way or the other.
If you are wrong, that is, the market goes up, you are only looking to sell the call when you can get 100% of your money back.
If you are right, with Corn trading down 20% you should have the opportunity to make a nice profit.
HERE IS A BULLISH STRATEGY…At this time of year, generally if the market does go up, it would usually be due to adverse weather. That being said, if you DO get into a weather market, a 20% rally could easily be on the low end of expectations.
3 approaches to the November Soybean contract
possibility-No opinion other than “It should move at least 15%, one way or the
In this scenario, you take the money if it prices trade either 15% lower or 15% higher.
HERE IS A BEARISH STRATEGY using the same expectation of at least a 15% move, one way or the other.
Same as in the Corn, if you are wrong, you are only looking to sell the call when you can get 100% of your money back.
If you are right, down 15% you will have the opportunity to make a nice profit.
HERE IS A BULLISH STRATEGY…Again, like the Corn, at this time of year, generally if the market does go up, it would usually be due to adverse weather. That being said, if you DO get into a weather market, a 15% rally could EASILY be on the LOW end of expectations.
In all of these strategies, the markets obviously have the potential to move greater than the 15% and 20% marks I have noted…especially if weather becomes a factor…
And which way do I think they are going?
It’s that time of year…
The truth is, at this time of year, the direction of these two markets depends on weather more than anything else…And I NEVER try to predict the weather, nor do I put ANY faith at all in “long range forecasts”. All you can do right now is try to trade along with whatever is happening, by which I mean, this IS a volatile time of year and IF THE MARKETS DO START TRADING HIGHER, you are supposed to go with it…In a drought, which does not happen overnight…the damage builds in intensity as each hot, dry day is added to the tally over a 3-4 week period…and the market’s response can be somewhat similar. As weather generates steadily higher and higher prices, market intensity can build as well…until they oftentimes suddenly morph into an upside explosion and a ton of headlines.
So, even though I have been resolutely bearish old crop Corn and Soybeans, although as of this moment I have no New Crop positions, I lean towards the long side for three reasons…
One-Two weeks ago, I received an email from an old Mid-Western buddy who has worked on the cash side of Corn and Soybeans his entire life, and knows the fundamentals in these markets better than anybody I have ever encountered. He is 60+ and grew up in the heart of Illinois farm country, and a few of his statements really got my attention: “I have never seen crops so far behind this time of the year. All across Iowa and in Western Illinois…They will be nervous about this year’s crop until harvest. An early frost could be devastating.”
Two-Even though I have been short old crop Corn and Soybeans, for many months I have been nothing more than an observer in new crop for both markets…And from the uncommitted sidelines, my take has been that seemingly the whole ag world (farmers, brokerages, analysts) is QUITE bearish new crop Corn and Soybeans…almost as though lower prices are a foregone conclusion...which, as always, makes me wary of being too quick to get short these markets. Where I DO believe they could be decidedly lower come next spring, this does not mean there can be some sort of very bullish phase before we get there…
Three-The weather is WEIRD. Very much so. And whether it’s too much rain, or too little, any abnormal weather can set these markets off.
So my bottom line is this:
I THINK BOTH THESE MARKETS WILL MATCH THE SORT OF MOVEMENT WE HAVE SEEN DURING THE PAST 10 YEARS…WHICH MAKES A VERY STRONG ARGUMENT FOR USING THE BOTH SIDES STRATEGY (CALLS & PUTS).
NEITHER CROP HAS BEEN “MADE”, AND ALL THINGS CONSIDERED (AS IN “SO FAR BEHIND”, WEIRD WEATHER, BEARISH SENTIMENT), I THINK THE TRADE IS TO THE UPSIDE.
HOWEVER, THE INTENT OF THIS NEWSLETTER WAS TO LAY OUT OPTIONS STRATEGIES THAT MIGHT BENEFIT FROM LARGE MOVES IN EITHER DIRECTION…AND THERE IS NO DENYING, PER THE HISTORICAL NUMBERS, BUYING EQUAL NUMBERS OF CALLS AND PUTS MAKE MORE SENSE THAN ANYTHING.
BUT IF YOU TOLD ME I HAD TO BE A BUYER OR A SELLER, I WOULD BE A BUYER...BUT ABSOLUTELY USING UNITS OF “2 CALLS & 1 PUT”. I FIRMLY BELIEVE THEY ARE GOING SOMEWHERE BIG, FAIRLY SOON, AND OWNING A LITTLE DEFENSE (WHICHEVER WAY YOU WANT TO POSITION) JUST MAKES A TON OF SENSE.
It’s your call though. I have been wrong about these markets for a while…and maybe still am.
Give me a ring if you have ANY questions or interest…
FUTURES TRADING IS NOT FOR EVERYONE. THE RISK OF LOSS IN TRADING CAN BE SUBSTANTIAL. THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THERE IS NO GUARANTEE YOUR TRADING EXPERIENCE WILL BE SIMILAR TO PAST PERFORMANCE.
The author of this piece currently trades for his own account and has financial interests in the following derivative products mentioned within: Corn, Soybeans