Grain Spreads: Long Term Thoughts

Sean LuskGeneral Commentary


I have posited in previous posts for those to consider long positions further out on the calendar in grains and energy. For good or bad, I see the country headed back to work and school come Summer and Fall. For grains, its start your engines as US planting season has begun where Mother Nature will be the biggest influence on future yields and prices in my opinion. There are a few so called weather gurus calling for a La Nina come July/August 2020, where for much of the Midwest could mean a hotter and drier period. In fairness there is always a talking head or two calling for some extreme in weather every growing season. In taking a look at the Janaury 2021 bean chart, I see a gap on the weekly at 9.05. In my view that gap will be tested eventually should the market rally. Im therefore suggesting one course of action to take advantage. It has benefits in the near term and is a long term static bullish play in the soybean market. Normally I would suggest just buying futures or some type of futures spread if I thought the market was moving higher. In this enviroment however, Im looking for a defined risk strategy where one collects money upon entry while later deciding on an exit strategy which could also collect money, or at the very least is bought back cheaper than where I sold it. Generic Weekly January 2021 Soybean chart below. I suggest buying a call spread with the long strike just below the gap, and selling a higher call just above the highs for the year. To finance this I suggest selling a $1.00 wide put spread in January Soybeans in the same area. Trade explained below. Keep in mind we can peel either side of this trade off if we rally towards the gap by late Summer. Long Jan beans encompasses potential weather issues in the USA either growing season or harvest, or intial issues in South America. Lots can happen to influence a possible rally long term.

Trade Suggestions:


Options-Buy the Jan21 9.00/10.00 call spread. At the same time Sell the Jan 21 10.00/9.00 put spread. Package all four legs, and bid negative 70 cents, which if filled would collect $3500.00 minus commissions and fees upon entry.



Options-The risk if filled at negative 70 cents would be 30 cents plus trade costs and fees in this example. That would mean that the call spread expired worthless while the put spread settled below 9.00 in late December. Im looking for beans eventually to challenge the gap and beyond. My upside target on beans sits between 994 and 10.02, essentially moving near five percent higher on the year.

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Sean Lusk

Vice President Commercial Hedging Division

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