Commentary: Central banks slashing rates, bailout packages emerging, mortgage and payroll tax holidays being put forth by Central Banks and Governments are just some of the latest announcements that investors are grappling with in the last week. Oil Price wars amid a global pandemic of Covid-19 virus has instilled a sense of fear and potential panic by investors as US stock markets reach circuit breaker levels yesterday. To combat these fears, central banks and governments have slashed interest rates and are finding new ways to inject stimulus. There has been a large amount of money pulled out of the stock market by fund managers sitting on the sidelines in my view. It can be quickly put back in the market should they deem yesterday’s 2000 point drop in the Dow as a bottom. In my view these funds wont sit on the sidelines for long as interest rates are slashed in the US while they are negative in Europe. A pathway to a cure for Covid-19 may ensure a bottom in stocks but until we are there, how much upside do equities have in the near term? Regardless the answer,it is my belief the actions taken this week are going to create inflation as interest rates are eased and monetary stimulus injected. In my opinion the grain sector could get a rally despite a big bean crop coming out of South America. I think that one of the effects of the virus that has caused major disruptions in supply chains and global commerce could be a shot in the arm for demand longer term. Countries such as China, South Korea, and Italy to name a few have had to eat into their food and energy reserves as their ports have been shut down or seen prolonged delays. In my view these reserves will need to be replenished. I see some bargains here as beans are down 8 percent, Corn, Chicago and KC wheat down almost 5 percent apiece for 2020. I have two trades to consider in Chicago Wheat and Soybeans. I figure they may have the biggest potential for upside as ending stocks for Soft Red Winter are at 7 year lows while ending stocks for beans are projected at just 330 million bushels per the USDA AG forum. Charts below. If 8.67 holds in Spot soybeans (May 20), I would look to implement a bullish option strategy. Chicago wheat basis May futures hit major trendline support near the 5.04/5.06 area Monday morning. See blue arrow. A close underneath and I think its katy bar the door to the downside. However should we hold it, I see a bullish engulfing pattern developing here where I could see a retest of 550 then potentially 590 basis May futures. First chart is wheat, then soybeans.
Trade Suggestion(s):
Option Trades: Both strategies are three way option trades. Selling put spreads to finance outright calls. May 20 wheat and Sept 20 soybeans. Sell the May wheat 6.00/5.50 put spread and buy the 550 May wheat call. The collection is 35 cents minus commissions and fees. The soybean trade calls to sell the 960/1060 put spread and buying the 980 call for a collection of 80 cents minus commissions and fees.
Risk/Reward: The risk on the wheat trade is 15 cents per 3 way spread plus trade costs and the risk on the beans is 20 cents plus trade costs. Since one is collecting money on this strategy upon entry on the way in, my exit strategy is to pay back as less as possible on exit. Sell high, buy low is the plan.
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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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