Neutral Nick Grain Marketing Plan and Results

This page has updates on the character Neutral Nick

With the volatile price action we have seen this week it has caused our marketing character Neutral Nick to have to make additional trades. When I looked at what adustments needed to be made to keep him near 100,000 bushels sold; i first thought to see if there was anyting great that locked in a profit. I really didn't see any trades where we where up more then a dime and generically speaking I don't want to lock in profits that end up paying more in commission then actual profits. So as a general rule Nick doesn't sell options unless he can get 10 cents or more and usually won't try to take profits for under a dime.

To keep him near 100,000 bushels of each wheat, corn, and beans sold Nick added the following which add to the hedge statement making it even more complicated. He sold 3 730 CBOT MARCH WHEAT Calls for 68 cents a piece.

With the March Wheat futures trading at 7.74 he figures this play is similar to adding 22 cents (7.30+.68-7.74) cents to his wheat price versus just a straight sale;or receiving 7.98 (if we expire above 7.30) his big risk is that we expire below 7.30 and which case he no longer has sales on.

For beans he added 4 short 13.00 March Soybean calls for 93 cents a piece. Once again very simliar to wheat in that this is a re-ownerhsip strategy via selling an in the money covered call.

For corn he switched things up a little bit as he sold 5 of the 6.60 March corn calls, sold 2 of the July 5.00 corn puts, and bought 5 of the February (Serial Option), 6.00 calls.

When looking at his performance for the past couple of weeks Nick leaves today a little dissappointed; as the last time he looked his July 10.00 Wheat calls that he sold where worth about 46 cents and the board was about a quarter higher. Yet today those calls are still worth about 46 cents even tough the board is a quarter or so cheaper. I guess that just helps show what swings in volatily can do to option prices.

Another thing that he has noted is that even though he has a net delta position that is show about 100,000 bushels his wheat options lost value alround despite the board showing weakness the past couple of sessions at a time when he was short.

Next week we have the USDA report out so Neutral Nick is trying to think and watch out for market trapes. When he thinks of marketing trapes or mistakes in trading/marketing one thing that comes to mind is leverage and the potential for over leverage on the wrong side of the market. So with the report out the one thing Nick won't be doing is adding short option positions that expire rather soon because the closer they are to the money and as time erods those options have the potentail to see thier gamma and delta move rather fast.

So the only really short term options Nick will work with heading into the USDA report will be those on the long side; wether it is a put to protect or a call to re-own.

Below is Nick's updated position

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Here is an update of what his position looks like after adding plays to keep him near his goal of 100,000 bushels.......delta equavilant hedged.

As mentioned every week at minimum he will add legs or take plays off to help keep his delta bushel near 100,000 bushels hedged; no cash sales or forward contracting just plenty of calls to the banker to get his line of credit extended as he tries to play both side of the markets until late June hoping his aggressive and most likely unrealistic style adds premium to his net ending price.

Note the pink lines are the trades done today to move his position closer to 100,000. You can see that it won't take much more of a rally in wheat and he will need to follow up via either taking off calls sold, purchasing futures, purchasing calls, or selling additional puts.

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12/29/2010
Long	# of	Option	Futures	Expiration	My Trade		Futures Price	Theoretical Opt. Value		Notional		Position Equivalent
or Short	Contracts	Symbol	Reference	Date	Date	Price	Last	Per Unit	Total	Position (bu)	Delta	Delta (bu)	Per Unit Change	Actual Gain loss todays close
SHORT	60.00	WN1000C	WN1	24-Jun-2011	23-Dec	49.250	836.250	47.375	$142,125	(300,000)	(0.33)	(98,558)	$0.01875	$5,625
SHORT	25.00	WN700P	WN1	24-Jun-2011	23-Dec	37.875	836.250	29.875	$37,344	125,000	0.21	26,015	$0.08000	$10,000
SHORT	10.00	WN900C	WN1	24-Jun-2011	23-Dec	73.500	836.250	72.500	$36,250	(50,000)	(0.45)	(22,724)	$0.01000	$500
SHORT	2.00	WN850C	WN1	24-Jun-2011	23-Dec	89.125	836.250	89.250	$8,925	(10,000)	(0.53)	(5,287)	$(0.00125)	($13)
TOTAL WHEAT	97.00								$224,644	(235,000)	(0.21)	(100,554)		$16,113

SHORT	5.00	SH1300P	SH1		29-Dec	34.500	1377.000	34.500	$8,625	25,000	0.30	7,455	$0.00000	$0
SHORT	40.00	SN1500C	SN1	24-Jun-2011	23-Dec	82.500	1386.500	90.000	$180,000	(200,000)	(0.42)	(83,222)	$(0.07500)	($15,000)
SHORT	50.00	SN1200P	SN1	24-Jun-2011	23-Dec	42.500	1386.500	39.000	$97,500	250,000	0.21	52,859	$0.03500	$8,750
LONG	20.00	SG1300P	SH1	21-Jan-2011	23-Dec	23.500	1377.000	20.000	($20,000)	(100,000)	(0.25)	(25,111)	$0.03500	($3,500)
SHORT	30.00	SN1600C	SN1	24-Jun-2011	23-Dec	62.000	1386.500	68.250	$102,375	(150,000)	(0.33)	(49,549)	$(0.06250)	($9,375)
TOTAL BEANS	140.00								$368,500	(175,000)	(0.13)	(97,568)		($19,125)

SHORT	6.00	CH680C	CH1	20.000	29-Dec	21.125	624.000	21.125	$6,337	(30,000)	(0.33)	(9,994)	$-	($338)
SHORT	55.00	CN800C	CN1	24-Jun-2011	23-Dec	30.750	635.750	29.875	$82,156	(275,000)	(0.28)	(76,953)	$0.00875	$2,406
SHORT	30.00	CN550P	CN1	24-Jun-2011	23-Dec	37.250	635.750	31.750	$47,625	150,000	0.25	37,976	$0.05500	$8,250
LONG	20.00	CG630C	CH1	21-Jan-2011	23-Dec	24.500	624.000	25.125	($25,125)	100,000	0.49	48,751	$(0.00625)	$625
SHORT	35.00	CH700C	CH1	18-Feb-2011	23-Dec	16.500	624.000	16.625	$29,094	(175,000)	(0.28)	(48,341)	$(0.00125)	($219)
LONG	30.00	CG600P	CH1	21-Jan-2011	23-Dec	23.375	624.000	16.625	($24,937)	(150,000)	(0.34)	(51,039)	$0.06750	($10,688)
TOTAL CORN	170.00								$115,150	(350,000)	(0.114)	(97,372)		38

You will notice that Nick used different styles with a rather big varience in regards to total contracts. In the wheat he simply sold calls and sold puts, while in the corn he has puts bought, calls bought, as well as both sold.

I should mentioned that when I asked for the margin requirments on these mock position it appeared that the wheat margin requirements where about two to two and half times that of simply being short the delta equivalant.

This will be one thing to watch as we go forward; to achieve what he wants how many additional trades will he have to add? Will it be successful or has he just created a creative plan to spend lots of money on commissions?

12-23-10

Neutral Nick has another unique style. He tries to sell all of his grain on July 1st; or when the July options expire; but in the meantime he uses delta neutral hedging ideas to try and collect premium. With the recent run up in prices he has the following plan for his wheat; 1st off he has HRW wheat; but he likes to use CBOT options because of liquidity. So he places GTC orders to buy 10 KWN and buy 10 WN at 50 cents and then again at 75 cents; if filled it keeps him hedged in correct contract.

He then decides that joy to the season and he places hedges that create a position that leaves him with a net delta position of short about 100,000 contracts of each corn, wheat, and beans. Thus leaving him net sold out. His style is over aggresive but his plan is to simple adjust as needed to keep his net delta short aprox 100,000 of each grain thus basically leaving him sold out.

The follow ups will be to keep position near a net of zero; i.e. if we rally he will sell more puts......if we break he will sell more calls.

In the wheat example if we stay between 7.00 and 8.50 he adds over 2.40 a bushel to his price; nearly a quarter of a million to his bottom line.

Below is a copy of the table used for the three commodities; look for him to add trades ever week or so to keep position neautral; keep in mind that his exposure or risk is huge if he doesn't follow things up as he runs risk of having way too much sold or owning more then he orginally did. This is a strategy that will and could take more then just a little margin or line of credit.

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Long	# of	Option	Futures	Expiration	My Trade		Futures Price		Theoretical Opt. Value		Notional		Position Equivalent
or Short	Contracts	Symbol	Reference	Date	Date	Price	Last	Over-Ride	Per Unit	Total	Position (bu)	Delta	Delta (bu)	Gamma (bu)	Theta / Day	Vega
SHORT	60.00	WN1000C	WN1	24-Jun-2011	23-Dec	49.250	823.000		49.250	$147,749.00	(300,000)	(0.328)	(98,430)	(400)	$779	($6,286)
SHORT	25.00	WN700P	WN1	24-Jun-2011	23-Dec	37.875	823.000		37.875	$47,343.00	125,000	0.235	29,485	(163)	$242	($2,237)
SHORT	10.00	WN900C	WN1	24-Jun-2011	23-Dec	73.500	823.000		73.500	$36,749.00	(50,000)	(0.445)	(22,269)	(75)	$137	($1,139)
SHORT	2.00	WN850C	WN1	24-Jun-2011	23-Dec	89.125	823.000		89.125	$8,912.00	(10,000)	(0.513)	(5,139)	(15)	$27	($229)
	97.00									$240,756.00	(235,000)	(0.199)	(96,352)	(653)	$1,186	($9,891)

SHORT	40.00	SN1500C	SN1	24-Jun-2011	23-Dec	82.500	1369.250		82.500	$164,999.00	(200,000)	(0.395)	(79,125)	(229)	$686	($7,408)
SHORT	50.00	SN1200P	SN1	24-Jun-2011	23-Dec	42.500	1369.250		42.500	$106,249.00	250,000	0.228	57,095	(262)	$582	($7,331)
LONG	20.00	SG1300P	SH1	21-Jan-2011	23-Dec	23.500	1360.000		23.500	$(23,499.00)	(100,000)	(0.291)	(29,156)	280	($725)	$1,319
SHORT	30.00	SN1600C	SN1	24-Jun-2011	23-Dec	62.000	1369.250		62.000	$92,999.00	(150,000)	(0.311)	(46,722)	(150)	$498	($5,125)
	140.00									$340,749.00	(200,000)	(0.139)	(97,908)	(361)	$1,040	($18,546)


SHORT	55.00	CN800C	CN1	24-Jun-2011	23-Dec	30.750	625.750		30.750	$84,562.00	(275,000)	(0.279)	(76,867)	(442)	$516	($4,091)
SHORT	30.00	CN550P	CN1	24-Jun-2011	23-Dec	37.250	625.750		37.250	$55,874.00	150,000	0.276	41,414	(268)	$248	($2,210)
LONG	20.00	CG630C	CH1	21-Jan-2011	23-Dec	24.500	614.000		24.500	$(24,499.00)	100,000	0.445	44,510	499	($540)	$683
SHORT	35.00	CH700C	CH1	18-Feb-2011	23-Dec	16.500	614.000		16.500	$28,874.00	(175,000)	(0.264)	(46,280)	(510)	$561	($1,394)
LONG	30.00	CG600P	CH1	21-Jan-2011	23-Dec	23.375	614.000		23.375	$(35,062.00)	(150,000)	(0.400)	(60,149)	761	($761)	$1,002
	170.00									$109,749.00	(350,000)	(0.114)	(97,372)	39	$24	($6,010)

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Neutral Nick Grain Marketing Plan and Results

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