Grain Spreads: Bargain Hunting

Sean Lusk General Commentary Leave a Comment

Commentary: I have been scanning the Board looking for value here amid the chaos and panic that has rattled markets and society the last few days. While it appears that this virus may stick around for longer than first anticipated, I suspect that prices will return to the mean across many sectors as industries eventually come back online and employees back to work. Cheap energy and relatively weak grain prices look like opportunities longer term as the liquidity the Federal Government and Central Bank are providing will bring amount inflation. For now the risk is deflation. For the year, Crude is down approximately 60 percent. Soybeans and Corn down just over 10 percent. Wheat slightly lower. I’m going to present three trades for consideration moving forward as I like the risk/reward ratio and they are defined risk.

Trade Suggestion(s):

Options Trade:

Buy the Dec 20 crude 50 call and sell the Dec 20 60 call. Cost to entry 60 cents. Cost of trade is $600.

Buy the Dec 20 corn 4.00/4.50 call spread for 8 cents. Cost to entry for $400.00

Buy the Nov 20 soybean 10.00/11.00 call spread for 6 cents. Cost to entry is $300.00.

Risk/Reward: the risk on each option spread is the price paid for each spread plus commissions and fees. The risk on Crude is $600.00 plus commissions and fees. The max one could collect is 10K minus trade costs. The risk/reward on the corn is $400.00 plus commission and fees. The maximum one could collect is $2500 minus trade costs. The risk/reward on the Beans is $300.00 plus commissions and fees. The max is 5k one could collect minus trade costs.

These are conservative but static long positions in the market through the second and third quarter of 2020. For the crude we are bidding below the market as the spread is trading near 75 cents. I want to have static longs of some shape or form longer term. These suggestions are a start. In my view the Fed is going to have the printing presses going again. In my view any time you print more of something it becomes worth less. Once the deflationary battle is over, we may see prices inflate.

Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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