Commentary: A week to remember for sure in commodities. Massive price swings in every sector, enhanced volatility, daily limits and circuit breakers hit and then hit again. The fear factor is weighing high on investor psychology as the exodus out of equities and the selling of commodities has ramped up given the alleged demand destruction in the near term. When you see percentage moves of this magnitude in a short amount of time, fund managers are liquidating en masse in my view, essentially taking their ball and going home for some. Given the sizable drops given mass liquidations across the Board, it appears that gaps are appearing over many charts. It is my opinion that these gaps will eventually be filled to the upside. The questions is when? Next week, next month or next year? The demand and deflationary fears that exist right now will not hang around forever in my opinion. Fiscal stimulus measures globally in my view will spur inflation down the road. This assumes we find a pathway to a cure in the next three months. In my opinion, I think the private sector will find it sooner than predicted. Again my opinion here. I think the gaps present opportunities for one to take advantage of future retracements from these lows. We maybe early here, but Im going to suggest a course of action in a few markets where gaps exist that I think can be seen as undervalued. Longer term bets, with defined risk that in my view will gain in value should the market rally.
Trade Suggestion(s):
Option trades: Gasoline spot RBOB futures fell below 90 cents. The Administration just announced that they are buying large quantities of crude and gasoline to eat up over supply per the President. Attached is a weekly continuous gas chart. I would consider going out to July 2020 options. Buy the 1.30 call and sell the 1.50 call for a price of 2.00.
Soybeans-have another gap on the weekly continuous between 885 to 889. Strategy calls for buying the July 880 call for 20 cents. Finance this by selling the July 960/900 put spread in July for 50 cents. Collection on the way in is 30 cents.
Hogs, the other white meat has gotten crushed this week. A few gaps of note here. If the US Government is buying energy, will they buy pork and beef too? It could be a possibility. Regardless the livestock market is littered with gaps. Use August options. Buy the 82 call for 300 points. Finance the cost by selling the 90/80 put pread for 800 points. Total collection for this 3 way option spread is 500 points.
Risk/Reward: for the July RBOB trade, the cost to entry if filled at 2 cents is 840 dollars plus commission and fees. Maximum collection is 20 cents or 8400.00 less trade costs. Approximately a 1/10 risk/reward.
Risk/Reward: the July Soybean 3 way option trade calls for selling a 960/900 put spread and buying the 88 call. Collection is 30 cents upon entry. Risk is 30 cents or $1500.00 plus commissions and fees.
Risk/Reward: the August Lean Hog 3 way option trade calls for buying the 82 call for 300 points. Finance by selling the 90/80 put spread for 800 points. total collection is 500 points or $2,000.00.The risk is also $2000.00 plus commissions and fees.
I have plenty of ideas across the Board with gaps in many of them. Please call or email and reach out if you have questions. Beans at 850, Gasoline at 90 cents and deferred hogs at 72 cents have piqued my interest as a good bargain. Could they still go lower? Absolutely. However I would rather be early here anticipating higher prices come summer. Each Thursday I hold a weekly grain and livestock webinar at 3pm Central. We discuss supply, demand, weather, and the charts. Sign up is free and a recording link will be sent to your email upon signup. Sign Up Now
Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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