Grain Spreads: Lock in May 470 Corn

Sean LuskGeneral Commentary Leave a Comment

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Commentary

The Weekly Grain Export Inspections report showed 31.2 million bushels of corn, 83.7 mil bushels of soybeans, and 12.8 mil bushels of wheat inspected for export during the week ending November 7.  Mexico is the destination for half the corn inspected during the week. Since the start of the marketing year, 161.5 mil bushels of corn has been sent to Mexico.  However, it was another low volume session for the flat price market in corn. Of note though the spreads found a lot of interest from the spec and commercial sectors. CZ24 vs CH25 volume climbed above yesterday’s level as values hit 4-month highs at 11.6 cents, with 82K contracts traded. It is interesting to see the interest in buying the Dec -March Corn s spread during the Index Fund roll that normally in my opinion sells CZ and buys CH through Wednesday. 

For those holding corn in the bin. Consider that this latest push higher maybe an excellent opportunity to lock in 470 May corn in the bin now and perhaps while early, to get a small jump ahead on next year’s production. Last week USDA released their first outlook for planting and put corn planting at 2 million acres higher than last year at the expense of beans. Please look at the trade idea below

Trade Idea

Futures-N/A

Options-Buy the May 25 corn 470 puts for 30 cents. Sell the Dec 2025 corn 4.00/4.60 call spread at 30 cents. Enter into this three-way option spread for even money. ZCZ25C400:460: K25P470 (1-1-1)

Risk/Reward

Futures-N/A

Options-This is an old and new crop hedge. The maximum risk here is 60 cents plus trade costs and fees. Risk on the May puts is 30 cents plus trade costs. Risk on the December call is 30 cents. We are entering in at even money. The value of the 470 put basis May25 futures is what will determine this trade. If May 25 corn drops and retests the August lows near 414, I would advise exiting the option premium between 65 to 70 cents collection. One then can decide to cover the dec 25 call spread or use it as partial hedge vs next year’s production. However consecutive closes over near-term highs at 461 and I am out with an approximate10-cent loss and will re-evaluate. 

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Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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Futures and options trading involves substantial risk and is not suitable for all investors. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. The information contained on this site is the opinion of the writer or was obtained from sources cited within the commentary. The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices.PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All information, communications, publications, and reports, including this specific material, used and distributed by Walsh Trading, Inc. (“WTI”) shall be construed as a solicitation for entering into a derivatives transaction. WTI does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71.

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