Commentary
After having topped its pivotal 40-day moving average at 58.73 after today’s opening, December soy oil surged higher. Dec Soybean Oil broke out of its wedge today in my view. Technically the trade in my opinion could be eyeing the next resistance at 63.60. That level represents 50 percent higher for the year. If that level gets taken out the next resistances in my view sit up at 66.07 and then 67.89 which represents 60 percent higher for the year. Palm Oil and Canola both hit all-time highs and that may have lead to money flow into soybean oil. What also can’t be discounted is the rally in Crude Oil futures. The energy sector could be poised to see futures leg up higher as end users across the globe scramble to lock in supply. Even China last week sent messages to its energy end users to secure supplies insisting they won’t tolerate rolling blackouts or shortages during the Winter months. A rising energy complex could lift all boats here and that makes Bean Oil an interesting potential play here. The counter argument as I see it in the grain sector is that you are in the midst of harvest where soybean yields could possibly be raised in next Tuesdays report. Remember the USDA found an additional 81 million bushels in last weeks on farm stocks report from last years harvest. A big miss in my view. That could push ending stocks to swell past 250 million especially if USDA raises yield above 51 bushels per acre. Today, IHS Markit (previously Informa) this morning pegged 2021 corn yields at 176.8 bushels per acre, up from 175.4 (bpa) last month, with production around 90 million bushels ahead of the USDA Sept at 15.085 billion bushels. Soybean yields rose from 50.0 to 51.1 (bpa) this month, with output there estimated at 4.421 billion bushels, an even 50 million bushels above the current government projection. Regardless the numbers, I am looking to buy the dips. Consider the following options strategy. My justification here is that the world is short palm and vegetable oil and that energy products will remain tight.
Trade Ideas
Futures-N/A
Options-Buy the March 22 Soybean Oil 70.00 call and sell the March 75.00 call. Bid the vertical call spread at 50 points.
Risk/Reward
Futures-N/A
Options-risk is the price paid for the option spread which in this case is 50 points or $300.00 plus all commissions and fees. The max one would collect if futures closed over 75.00 at March option expiration in late February is 3K minus all trade costs and fees. Collecting the max is a tall order in my view. That said I think given the technical action recently looks like the path of least resistance is higher and I’m examining ways to get long while mitigating the risk as much as possible. Please call or email with questions.
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Sean Lusk
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