Grain Spreads: Adding Length

Sean Lusk General Commentary Leave a Comment

Commentary:

Trend and Index following funds are pushing the envelope as they amass a sizable long position of over 700K contracts this week per CFTC data. That is if you combine all 3 wheat classes, corn, and the soy complex. The buildup comes on a few fronts in my opinion. First, drought like conditions in major global production areas that has resulted in lower carryout’s for domestic corn, beans, and wheat. Second, an inflationary backdrop where major currencies like the Dollar, Euro, and Pound to name just a few have become worth less due to all the money printing by their respective Treasuries. It’s hard to see this ending anytime soon as damage to their respective economies will keep these policies in place amid a negative rate environment. Where do funds go? Do they keep adding in grains or do they look for other sectors deemed potentially undervalued? In my view I think corn is still undervalued at current levels as are feeder cattle and hogs. A persistent La Nina weather event in South America is in effect now for Brazil and Argentina this growing season. Its could delay corn planting in Brazil amid a late planted soybean crop. This issue along with China raising their import quotas for corn as their stockpiles have been could be a game changer for demand as USDA estimates are too low. Hogs I think are just a matter of time. ASF is still a major issue in China and the rest of Asia despite what they are telling everybody. Meanwhile 80 cases have been found in Germany in their Wild Boar populations. Should this explode in Europe, and infect their pig populations, look out higher in my view. Deferred Feeder Cattle contracts feel cheap to me already and even more so if they trade below 1.25 basis April futures. Drought in the Western plains could be an issue down the road. A fifty percent retracement on the weekly continuous is at 125. That is from the Spring lows to the Summer highs.

I suggest three option strategies that are static longs in the market with defined risk and unlimited upside. All 3 suggestions are three way option strategies. Low margin and relatively low risk in my opinion with unlimited upside potential.

Trade Recommendations

Futures-N/A

Options-

Corn-Buy the Dec 2021 450 call and sell the Dec 21 6.00/5.00 put spread. Bid -80 cents on the spread to collect $4K.

Feeder Cattle-Buy the April 21 150 call. Sell the April 21 150/160 put spread. Collect 850 points or $4250 per spread upon entry.

June Hogs-Buy the June Hog 100 call. Sell the 110/100 put spread. bid the spread at -920. Collect $3680 upon entry.

Risk/Reward

Corn-One is collecting 80 cents on the way in or 4K minus commissions and fees. The max loss is $1.00 or 5K. The risk is 1K plus trade costs and fees due to the collection upon entry.

Feeder Cattle-One is collecting 850 points or $4250 upon entry minus commissions and fees. The max loss is 5K plus trade costs and fees. The risk is $750 plus trade costs.

Hogs-One is collecting $3680 upon entry minus trade costs and fees. The max loss is 4K plus commissions and fees. The risk is 320 dollars plus trade costs and fees.

In summation, These are sizable collections upon entry filled at the prescribed levels for this strategy. It’s one strategy to get long the market not THE way. The goal is simply to buy the long call-short put spread strategies cheaper than from where we sold them. Please call me with questions. 888 391 7894 or slusk@walshtrading.com

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