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We feel confident that the bear market in corn died on August 12, bottoming on the bearish USDA report that added 1.9 million harvested acres of corn and 7.8 bushels per acre to the yield. Despite extremely strong demand, this market is comfortably supplied and appears likely to drift sideways. To capitalize on sideways trading range we are recommending a short straddle, collecting premium if the market expires near the strike price.
Short Corn Straddle Recommendation
Entry: Sell two 440 May corn puts, and two 440 May corn calls for a total of 40¢.
Alternative Strategy Considerations: You can employ a similar strategy in the March, selling both for a combined premium of ~30¢, or in the July for a combined premium of ~50¢. Additionally, you can choose different strike prices and receive roughly the same premium.
Target: Sideways trading range. Ideal situation is a May expiration at 440.
Risk Exit: If May futures close over $4.60, we would recommend exiting this strategy.
Additional Commentary: If you move the strike up, your profit window moves up as well. The reason we chose what looks like a “low” strike, is twofold. One, we think the market is likely to drift sideways or come down slightly to meet the cash, and with this strategy you really want to ‘guess’ the expiration price. And two, many will use this strategy as a pseudo hedge which nets 480 on any expiration above the 440 strike, but you lose 2¢ per bushels under the strike (lose 2¢ from 480 for every cent below 440 we are at expiration), so the higher the strike the greater the risk. This strategy (not including cash corn) is profitable between 480 and 400.
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Disclaimer: The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Brock Investor Services, Inc believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice is based on the opinion of Brock Investor Services, Inc and reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. There is a risk of losses as well as profits when trading futures and options. This brief statement does not disclose all the risk aspects of derivative trading, therefore careful study carrying FCM’s Risk Disclosure is strongly encouraged before the recipient of this email trades.