I’m seeing some bargain opportunities here within the grain sector despite all the negativity in the market. I think that there rea some realistic bets one can make here to establish some longer term bullish plays using some calendar spreads and inter-market ideas, that from a timing stand point are starting to make some sense to me. First Idea is to look at Dec 20/Dec 21 corn. Its currently sitting at a 19 to 20 cent carry vs Dec 21. In a bullish environment this spread should tighten as Dec 20 corn will gain in value vs next years crop or the 2021 corn crop. The chart has been in a steady downtrend, just as the corn market in general has. Ethanol demand or the lack thereof has been another black eye for a disappointing demand outlook over the last six months. However, in my view commodity pricing is cyclical and with it being the advent of planting and growing season, the number of unknowns surpass what is already being priced in the trade. In my view the market will be entering into a supply side driven pricing model as we enter into US growing season. Demand while important will take a new back seat to supply side concerns. In lieu of any short squeezes for old -crop contracts that may enter into the market at anytime given port closures and lack of commerce due the Pandemic, I would opt for new crop contracts to establish longer term longs with defined risk. One futures and one options trade for consideration.
Futures Trade: Buy the Dec 20 Corn and sell the Dec 21 Corn at a 20 cent carry.
Options Trade: Buy the March 21 450 call for 6 cents. While at the same time March 21 5.00/4.00 put spread at 93 cents. Total collection is 87 cents.
Risk/Reward: the futures trade has a risk of approximately 5 cents if filled at 20 cents under. Place a stop loss at 25 cents Dec 20 under. My profit objective is to sell the spread at 6 cents Dec 20 over Dec 21. That would be a collection of 26 cents minus trade costs and fees.
The options trade collects 87 cents upon execution. The risk is 13 cents plus commissions and fees. The goal there is to exit the three way option spread at even money should the March 21 corn rally up and test the 2109 highs near 470.
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