Commentary: Amid the chaos in financial markets that have seen extreme volatility in the indices, energy, and precious metal sectors to name just a few, I posit amid the uncertainty that tangible asset areas like grain and livestock will eventually be sought after. In my view, funds that have gone to a “cash position” on a certain percentage of holdings may look to sectors that from a percentage standpoint maybe seen as undervalued. One sector within the grains is wheat. Per the USDA, soft red winter wheat ending stocks are currently at a 7-year low, approximately 107 million bushels. Planted wheat area increased from the year prior at 500 K acres approximately. Not a big increase but its not what you plant, but grow. Chicago wheat began the calendar year at 559. Todays front month futures May contract settled at 527. Futures are down almost six percent with much of the losses the last two weeks. Should we reach a loss of ten percent, futures would fall to the 5.04/5.05 area. Please see chart. That level is major trendline support and a fifty percent retracement level. Retracements in theory usually reach the half way back thresholds over time in my opinion. Not always of course and given the current environment with increased volatility anything can happen and caution is heightened. In my view I think fund managers are going to be looking for discounts going forward. Given the low ending stocks for Chicago wheat, if we have weather issues come Spring, I envision a rally to 5.60 and then potentially 6.18 which would be near ten percent higher on the year. Again my opinion here.
Trade Suggestion(s):
I suggest a three-way option strategy to potentially take advantage of a rally into Spring. Have orders working to buy the July wheat 6.00 call while selling the 6.00/550 puts spread at as a three-way package for negative -36 cents OB. This spread settled today at negative 29, so we are trying to enter on a further break in price.
Risk/Reward:
The risk is 14 cents or $700 plus commission and fees per option package. The reward is the collection of 36 cents upon entry with and exit strategy of having offers at positive ten cents for exit.
Options – Buy 1 ZWN20 600 Call, sell 1 ZWN 600 put, buy 1 ZWN20 550 put
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