TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty
A FENCE IN CORN
December 2020 corn futures (as of this writing) are trading at $4.10. A $4.00 put is trading at 21 cents and a $4.60 call at 10 cents. Using the above figures, purchasing a $4 put would establish a price floor at $4.10 (less premium paid, commission, and fees). In this, you establish a price floor and leave the top side open for price appreciation. If you introduce selling an out-of-the-money December call, you are attempting to collect premium with a goal to reduce the cost of the put.
In a fence strategy, if you hold both positions until expiration (the last day for December options to trade), one of three things will happen. Both options expire without value, the put option has value and the call expires without value, or the call has value and the put has no value. If both lose their value, the net result is you reduced the cost of the put by premium received for the sold call. If the put has value and the call expires without value, you have reduced the cost of your put by the premium collected from the sold call. If December corn futures, at expiration, is above the sold strike price, you still collect the sold premium from the short call and you lose the premium of the purchased put. The short call will be exercised, which means you will be assigned a sold December futures contract at the sold call strike price. Remember, however, your corn is still unpriced and gaining value up to the sold call strike price. Risk is considered unlimited in a short call position. You will need to be prepared to make margin call.
As with any strategy, be sure you have a clear understanding of the potential risk and desired benefit. Have a clear understanding of what happens if prices go down or up, a little or a lot.
If you have questions or comments, contract Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.