Comparison of a Couple Trades

I read a blog today that had some info on sales strategies that one might consider (DTN's market matter blog); I left my comments on some of the things I seen with the marketing possiblities and wanted to compare a couple possible strategies in the eyes of a producer.

So i compared two strategies; one was the sale of a 7.20 Dec corn call; along with the purchase of a Dec 5.80 corn put and the other strategy was the sale of a 7.50 Dec call along with the purchase of a 6.50-6.00 bear put spread.  I did these comparisons based on when the options expire and I used the close of Feb 1st to try and compare what net a producer would recieve.  So I calculated the gains and losses plus where futures to give a net recieved via a producer using such a hedge.

Below the pink line is the 3-leg trade of buying a 6.50-6.00 bear put spread while selling the 7.50 call in terms of what the producer would receive for his hedge gains or losses at experation provided he sold the grain on at the same time the options expire.  The green/blue line is what a producer would recieve via selling the above mentioned call and purchasing the above mentioned put.

The above helps show the benefits of both of the trades; simply put the 3 leg trade adds to a producers bottom line and leaves a little more upside then the other trade does.  They both have caps or a max net price that a producer will receive. The draw back of the 3 leg trade versus selling of a call to help pay for just a put is the fact that the producer doesn't have complete coverage; which is shown on the right side of the graph when the pink line starts losing versus the green line. 

So to summarize 5.00 ish or better the 3 leg trade nets more and in some cases quite a bit more; whereas the 2 leg trade provides much more downside protection if the market falls out of bed. 

Other things to keep in mind would be margin requirements, flexiblity (i.e. is it easier to get out of or adjust a 3 leg trade or a two leg trade), and understanding of how the options will be priced or valued before experation based on what if factors. 

The reason I prefer the 3 leg trade over the other would be probablity of the trade it self.  In that if are unchanged the trade simply add's 50 cents to my bottom line and actually add's to one's bottom line all the way up to about a 50 cent rally.  Logic says that markets can go three ways; up, down, or sideways.   The three leg trade doesn't do enough on a down market; as nothing really does; but it can be a winning trade if the market is going up, going down, or simply trades sideways; while the other when looked at as a trade via it self can lose in all three of those markets as it will never add to one's bottom line in an up or sideway's market.