Grain Spreads: Wheat Strangle

Sean Lusk General Commentary

Commentary

Chicago wheat saw some early strength this AM amid the third day of the Goldman Roll. Other than that, it was another rally that challenged over 6.00 that faded slowly into the close. Kc and Minneapolis finished unchanged. It is my view that falling corn prices are weighing on wheat futures, with U.S. Dollar strength also undercutting the market. But export bookings have pushed above year-ago levels with some significant Chinese buying in early December that featured soft red winter wheat. The buying exceeded the pace needed to match USDA’s 2023-24 forecast. Yesterday’s February USDA report did not result in many changes for the balance sheet. US carryout increased by 10 million bushels on lower flour grind with totals being the lowest 4th quarter on record. Hard red winter or KC wheat exports were lowered by 5 million bushels to 140 million with HRS increasing by 5M bushels to 230M bushels.  Technically the market is starting to wedge, becoming too range bound. The longer the coil, the potential exists for a larger than protracted move in futures in my opinion. But which way? Seasonally it’s not uncommon to see late winter early Spring rallies in wheat as the crop moves out of dormancy amid a risk and weather premium.  Who knows this year though as an unseasonably warm winter have possibly reduced any winter resilience with cooler temps forecasted later this month. However, with prolonged weakness in corn and beans, sustained rallies maybe hard to come by. Trade idea using a options strangle. 

Trade Ideas

Futures-N/A

Options-Buy the April Chicago wheat 650 call and at the same time the April wheat 550 put. Bid the strangle at 8 cents. Strangle settled at 9.2 today. ZWJ24P550:C650[SG]

Risk/Reward

Futures-N/A

Options-the risk for the strangle is the price paid, which in this case is 8 cents or $400 plus trade costs and fees. I would risk 5 cents from entry on a GTC stop at 3 cents and OCO that with a 40 cent offer to close Good to Cancel. 

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Sean Lusk

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