Monday, January 9, 2012

Trades ahead of the USDA Crop report - for producers hedging

Producers hedging ahead of the USDA Crop report
Jeremey Frost

These strategies use corn
A couple of reasons; 1st I think that corn is king and wheat is a follower
2nd I feel that the wheat grown in our area (HRW) is cheap versus corn; so if I am hedging (protecting) I would prefer to over protect what I feel is overvalued in relationship between commodity prices
3rd corn options and CBOT wheat options are much more liquid then KC or MPLS options
4th these strategies or concepts can be used in various commodities using options as a tool so the strikes perhaps are not as important as the concepts them self
For more info on the concepts please feel free to join us for our marketing meetings as we cover some of the strategies that will follow.  The next one being Tuesday Jan 10th.

Simple Marketing 101
Risk Diversifcation – are you sold where you should be?
If yes; do you feel you need to re-own should we rally?  Buy a call
If you are not sold; are you protected?  If NO then buy a put or make sales to get you to a comfort area.
Which calls or put’s do I buy?
That is and always will be preference; once again proper risk management probably means proper risk diversifcation.  Such as buying at the money, out of the money, and a variety of time slots.  Feb, March, May, July?
Really it is preference to cost and personal situation;
Myself I prefer to buy short term ones that will act like futures should I be right much quicker then the far out ones; plus if I move away from  the money the cost I feel is reasonable.  Especially given the price moves that have happened historically given in this report

Example of some corn options with their cost
Feb 6.50 puts – 20 cents / 6.00 puts 4 cents
Feb 6.50 calls 24 cents/ 7.00 calls 8 cents
March 7.00 calls 15 cents/6.00 puts 10 cents
July 6.00 puts 24 cents/ 7.00 calls 40 cents
Bottom line the longer and better protection you want the higher the cost

Simple trades
A) make cash sale and buy a call or a bull call spread or use a min price contract (strong basis) 
B) Buy a put – (weak basis)
C) Use a strike level from previous slide that fits with your operation and time period; considering the cost/reward ratio

Other types of trades
Selling options to pay for other types of options
Such as buying a Feb call/put and selling a March or July/call or put
Sometimes creating a ceiling/sometimes buying options and selling options that are looking for same direction thus minimizing risk if one picks wrong direction
Ratio spreads; selling 1 option to pay for more then 1 option
the following trades will have margin risk; unlike the simple trades above of buying an option; 
these trades as with all futures and options are risky and not suitable for most

Calendar Spread (same direction)
Purchase a 6.20 Feb put/sell a 5.70 March put (net cost aprox 3 cents)
Purchase a 7.00 Feb Call/sell a 7.50 March call ( net cost aprox 2 cents)
Purchase a 7.00 Feb call/sell a 8.50 July call (net collect aprox 4 cents)

Calendar Fences
Sell July 9.00 corn call purchase the March 6.00 put for a net cost of aprox 3 cents
Sell the July 8.00 call Purchase the 6.20 March put
Sell the July 9.50 call  purchase the 6.00 Feb put

Free Ratio Calendar Spread
Sell July 6.70 call; purchase 12 to 1 ratio the 6.00 Feb Put
Sell July 7.00 call; sell July 6.00 put; purchase 7.00 Feb call/6.00 Feb put.  Ratio of 5 to 1
Sell July 7.50 call; purchase 2 of the 6.30 Feb Puts

Protection –Upside – Re-ownership
Purchase July 6.30-5.30 bear put spread/sell the July 7.50 call for even money
Purchase Dec 5.50 – 4.50 bear put spread/sell the Dec 6.70 call

Light on protection, upside potential/pay to store
Sell July 8.00 call – 16 cents
Sell July 7.50 call for 25 cents

Not want complete upside risk- sell the 7.50 call and purchase 8.00 call; net collect 9 cents; but now have limited the risk; 

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