Using Options and Technical Analysis in a Soybean Countertrend Strategy

Timothy Brace General Commentary, Grains Leave a Comment

After a rally in Soybeans uncharacteristic for this time of the year, the Nov 19 soybean futures currently trading at 930, could be poised to make a potential near-term move to test the key 961-963 resistance area. Should this happen, an interesting counter trend speculative or hedging strategy, could consist of the sale of the Nov. 2020, 1100 – 1200 call spread for a credit, which if this soybean price level is reached in the relatively short-term with an accompanying small spike in volatility, should trade at or near 16 cents or $800 per 5,000 bu. Contract – fees. Using this strategy, the best way to prepare for this move would be to put a  Good-til-cancelled spread offer in at 16 with a buy stop at 24, limiting your risk to approx. 8 cents + fees, per spread, in a normal market.

Should beans makes this move up quickly and this spread order get filled, anticipating a higher than average probably of at least initially retreating from this key technical resistance area, a speculator might want to consider covering the sale and taking quick profits as this spread still has a year to expiration during which time a lot can happen.  Nonetheless, this trade has an upside break-even point, irrespective of fees, at Nov. 2020 settlement at 1116. This allows a hedger upside potential to this price point and approximately 16 cents of downside protection in the form of the premium received. 

Note:  Selling (“writing” or “granting”) an option or option spread, generally entails considerably greater risk than purchasing options. Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of that amount.”

By Timothy Brace
Senior Broker

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