Trade Comparison

Lots of times many ask what type of trades or moves should one make given XYZ circumstance.  In the world of commodity futures and options there are so many variables it is tough to know what the right decision is at any given time. 

The thing one is suppose to do when deciding how to trade, hedge, or market one's grain is the risk-reward and benefits-drawbacks both known, known that is unknown, and the unknown unknows.

I am not going to attempt to cover any of that; nor will I got into other facets that are very important such as cash flow management.

What I have been working on is a spreadsheet showing trade comparisons.  (Part of the reason I am working on it is my wife is going to build me a viynl replica of the graph showing the trade comparisons so I can have the info on my office.)

I am still working out some kinks before I distribute the excell spreadsheet.  I do have many strategies listed and for the graph below I used July corn and the option closes from 1-21-11.

Because of the many different trades I have broke the graph up a little bit in an effort to keep the noise down a little on it.

Here are the options used in this comparison

	Strike	Cost
FUTURES	$           6.71	$                    -
ATM PUT	$           6.70	$                0.69
ATM CALL	$           6.70	$                0.70
OTM PUT	$           5.50	$                0.18
OTM CALL	$           7.70	$                0.39
Deep OTM CALL	$           9.00	$                0.17

Here is a quick run down  of some of the trades and the expected return at expiration based on X Price.  Keep in mind July futures are at 6.71; also this doesn't look at net to a producer; this is net of a trade by itself.

Keep in mind that as producers your generically speaking on's net worth simply follows the long futures line; in that if we go up in price you make more money and if we go down you lose money; so all long or short futures should run at a 45% angle if a graph is centered.

This first graph is meant to try and show comparisons between straight long and other trades that are simliar in manner.  Such as a replacement trade as well as long calls and short puts.

I will be adding some more comparisons as I do have them set up on spreadsheet; but for now and thinking in terms of grain markeitng I am looking to compare ownship methods.  So if a producer is unsold or basic long futures do any of the above trades look to have a better risk reward profile then the simply long futures? 

Sell cash and go long a call looks like it has a little less risk; but it will be impossible to get the same upside as simply staying long.

The generic play I like is one that should tie into basis sales; i.e. times of a great basis the re-ownership strategy has benefits over the straight long futures.   I would refer to the sale of a put and purchase of a call, calls spreads all act similar to what a futures contract does.  If one sells a put and the market goes up your now short put is worth less in value; while if we go up calls and call spreads should appreciate in value (minus the time decay and other greeks that help determine an options value.)

You can see above that the green line out performs the straight long futures contract rather well until we get above the short call at which point this trade becomes capped.