Strangle the Corn Market?
For well over a month, the corn market has traded in a sideways price pattern. Prices can’t seem to find reason to rally while traders seem to have little interest to sell at lower prices. Thus, a range of about $0.15 has developed. This is not unusual at this time of year. The market will need more news to break out to the top or bottom of its current range. From a bigger picture perspective, tight ranges usually don’t last for an extended period of time. A more moderate range in the corn market of likely $0.50, or $0.25 higher or $0.25 lower, does have some historical relevance.
Why this is important…
Most farmers will concentrate on getting the crop harvested and putting it in the bin. There isn’t a lot of producer selling interest at current price levels, since it is well below many insurance levels that may pay an indemnity. Those who need to sell may likely only do so because of lack of storage space. If storing, you’re hoping that basis improves, price improves, or both. With a carry charge (where deferred contracts are priced higher than the front month) currently reflected in deferred futures contracts, the market is telling you to store corn. There is, however, risk that cash prices only rally to the level where deferred prices are trading and never get much beyond that point. As far as price pressure, history suggests that a significant price decline beyond the harvest time window is unlikely.
What can you do?
Consider strangling the corn market. This is a strategy that incorporates selling call options above the current futures price and put options below the current futures price. You are selling the right to either be long futures at the call option strike price or short futures at the put option strike price. You as the seller, also known as the writer, collect the premium. You are betting that one of three events will happen. One is that the price pattern remains range-bound. Consequently, premium erodes on both sold options, eventually declining to a point where the options expire worthless in your favor. A second is that the futures rally and the short call is exercised. That gives you a hedge (short futures) at the sold call strike price plus the premium collected on both options. The third is for corn futures to decline to a level below the sold put strike price at expiration. If that happens, you will be assigned a long futures at the put strike and collect the premium on both options. In all cases, you will likely also pay a commission.
A current example using the July 2024 corn futures currently trading near $5.10 (as of the writing of this Perspective): If you sold a July $5.80 call for 12 cents and a July $4.60 put for 12 cents you would stand to collect 24 cents (less commission and fees) if July corn futures on option expiration date (6/21/2024) closed between these strike prices. Should July futures, on expiration date, be above $5.80 or below $4.60 you will be assigned a long or short futures. Breakeven is $4.36 on the bottom side of the spread and $6.04 on the top side (before paying commissions and fees, which vary from firm to firm). Note this position has unlimited risk exposure and requires initial and maintenance margin. Before entering this position, have a full understanding of the potential risks this strategy could incur.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
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