Grain Spreads

Sean LuskGeneral Commentary, Grains

Commentary: Commodity prices remain under pressure for the most part in my view despite strong rallies in equities that have been impressive. Investors in the equity sector seemingly are in favor of the Administrations phased plan to re-open the economy. In my view a bad plan is far better than no plan at all. There was also some positive news about a treatment plan from the University of Chicago that looks promising. While not a vaccine it could be a pathway to a cure for those that continue to get the virus. Let us hope that the findings revealed results in a continued positive impact for patients and becomes accepted by the scientific community. This would offset the current political folly in Washington DC and perhaps for a minute keep many in the Press sane for a few days. As all of this relates to grain and livestock markets, we need to keep a long view, I think. The current pain and demand destruction near term perhaps could be met with an increased demand and diminished supplies on the back end. This comes on thoughts that as nations shut their own borders and hoard supplies, one’s own reserves are depleted. Those reserves need to be replenished. That money printing at the various Treasuries and Central Banks around the World that have printed trillions of dollars in their own currencies to stave off deflation will inherently create inflation on the back end. I am not talking next month, but in 4 to 6 months we could be having a different conversation regarding the economy and outlook. For grains though weather is always going to have to play a part for any rally. I am starting to consider yet again selling deep out of the money put spreads for a sizable collection and use the credit to finance of closer to the money calls. The trade I am suggesting is to sell the Nov 20 soybean 1060/960 put spread and at the same time use the credit to buy the November 920 call. See chart and look at the gap at 903. Currently it looks like Nov 20 beans could be headed for the 832 area and retest the yearly low prior to any significant rally taking place. If that occurs, these option prices become a bargain in my view as we head into planting season.

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Trade Suggestion(s):

Futures Trade: N/A

Options Trade: Options – Buy the Nov 20 soybean 920 call and Sell the Nov 20 soybean 1060/960 put spread. Bid Negative 80 as a GTC on this three-way option spread. It settled Friday at negative 74 cents.

Risk/Reward:

Futures: N/A

Options: Options – One is taking a collection upon entry here. A collection of 80 cents would result in a $4,000.00 collection per 1 three way spread minus commissions and fees. The goal is to collect on the way in and if fortunate collect money on the way out. Nov soybeans would need to trade over 10.00 by late Summer for that to be achieved. In any terms we would like to sell high and buy back low. The risk in this scenario if filled at an 80-cent collection would be 20 cents or $1000.00 plus commissions and fees.

Call me with questions. There are many ways to play the upside with defined risk and lower spread margins. Every Thursday I hold a weekly grain and livestock webinar at 3pm Central. We discuss supply, demand, weather, and the charts. Signup is free and a recording link will be sent to your email. Sign Up Now

Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
312 957 8103
888 391 7894 toll free
312 256 0109 fax
slusk@walshtrading.com
www.walshtrading.com

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