Grain Spreads: Gameplan January Report: Corn

Sean Lusk General Commentary Leave a Comment

I have something to consider going forward into Fridays report regarding corn and how one might trade it. I see volatility picking up into Fridays Janaury 10th USDA report followed by the suppossed Phase One Deal signing with China on January 15th. Should we get any specifics on increased demand from China, we could trade over 4.00 in spot March purely on short covering by funds in my opinion. However if no specifics are given coupled with a bearish tilt on last years production from the USDA, we could see funds add to their shorts sending the market testing 360. We may see neither and a sideways market until more is known about South American Production into February and then maybe a bigger protracted move. Here are some thoughts and ideas to consider into Fridays number and next week.

The immediate gratification play in my view is to option strangle the corn using Feb options. Relatively low risk in my opinion and  a volatility play. With the Chinese coming to Washington over the weekend. Signing a Phase 1 possibly next Weds. We could see volatility increase the next 5 to 6 sessions. Keep in mind that the Chinese  could rug pull this deal creating a near term hard sell-off. I wouldn’t rule out anything.

Feb options expiring on January 24th.
Buy the Feb 20 395 calls and at the same time the Feb 20 Corn375 puts
Bid 4.4 cents,. Pay 225 plus commissions and fees.
If no move we are out, I imagine we would evit with a 2,4 to 3 cent loss per spread.
If we get 15 to 20 cent move or greater we might at least double if not triple our return. I suggest putting a 20 cent offer on each side and Im likely holding to late next week after the Phase One Deal or no deal.

Longer term

Here is a trade to consider in corn long term but not my only idea. I want to be long on breaks the first half of this year.
If any South American weather issue erupts. I think we fly higher in corn. The USDA though may continue to impede price with their usual way they are counting last years production. There is estimated to be close to a billion bushels still out in the fields in the Dakotas, Wisconsin, and Minnesota To my knowledge they still count it as on farm stocks and perhaps into their production estimates. While its not in the Bin, it can still succomb to having the stalks knocked over on blizzards and wind storms..ie.. adverse winter weather. That’s why a long in the market longer term is preferred in my view.
Sell the July 450/400 put spread for 37 cents and collect 1850 minus commissions and fees. Risk is 13 cents.. or 650. You would only take the max loss if July 20 corn settled below 4.00 in late June. We probably won’t be holding our positions that long. Use the collection to:
Buy the July 430 call for 11 cents. 550 cost and risk
Buy the May 380 puts for 8.4 cents 425 cost and risk
Total collection for all 4 legs is 850 minus commissions and fees.

Optimal move is to see at least a 30 cent rally basis July. Where we could sell the out right 430 call for 35 to 40 cents
And buy back the short put spread for lets say 16 to 20 cents. This would ensure a collection on entry and exit.
Should we break first. We can look to sell the May 380 put for 25 cents. That would add another 1250K collection and reduce our max risk to approximately 500 bucks per spread. In this scenario, if we decide to liquidate all sides on a price break I envision the gain being a couple 4 to 6 cents after commissions and fees. Im strangled long term with the buying of the puts, but have a static long in the market. Call or email me with questions on the strategy. My goal as always with options is to collect money on entry and again on exit.

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