Overnight, March Corn was down 1 ¾ cents at $4.15 ¼. The included chart shows that March Corn continues to trade within the $3.75 to $4.25 trading range. The latest rally over the last few days has shown some promise that something new is occurring. The evidence for something new occurring in corn prices comes because the rally high of a couple days ago took out the previous rally high from a week ago and the with the rally, the purple ADX line has begun to rise, which hasn’t occurred throughout this whole consolidation range. Today, the directional movement indicators continue to be bullish and the ADX line continues to rise. Yesterday, we added to our bullish posture by adding the following May corn positions. Yesterday, we sold one May Corn $3.70 put option for 9 cents, or $450 gross credit. We also bought one May Corn $4.30 call option for 29 ¼ cents and sold one March Corn $4.60 call option for 18 ¾ cents. So the call spread cost 10 ½ cents. Combined with the short put option and the total overall cost of this combination trade was 1 ½ cents or $75. A few hundred dollars of margin collateral was also required because we are naked short one put option at the $3.70 level.
May corn option expiration is in 114 days. So what are the possibilities for this trade? Well, at expiration, if May corn finishes above $3.70 and below $4.30, then the loss will be $75 gross. The maximum gain at expiration would be if prices close over $4.60, and then the profit would be 28 ½ cents or $1425 gross. The risk is unlimited if prices begin to fall below $3.70 because of the short naked put. Between here and expiration, if May corn prices begin falling below the recent trading range in the $3.75 to $3.80 area, then I would be wanting to liquidate the trade. Also, if May corn prices rally sharply in the near term, I may just take early profits on the whole trade. If May corn prices rally steadily over the next month, the short put will drop in value and we may have an opportunity to liquidate that part of the trade early. So, there are a lot of possibilities with this trade as prices move and time goes on.
Followers of this letter should be:
Long one March Corn ($4.30 strike) call option from 17 ¼ cents and short 2 March Corn ($4.90 strike) call options at 7 3/8 cents each. (As a result of the profit made on the short $3.20 puts, our cost basis of this ratio spread is now a 1 cent credit!)
There are 51 days left until March corn options expire.
Short one May Corn ($3.70 strike) put option from 9 cents or $450 gross credit.
Long one May Corn ($4.30 strike) call option from 29 ¼ cents and short one May Corn ($4.60 strike) call option from 18 ¾ cents for an overall cost of 10 ½ cents or $525 gross.
There are 114 days until May corn options expire.
David Hall
The information and opinions contained herein comes from sources believed to be reliable, but are not guaranteed as to accuracy or completeness. The risk of loss in trading futures and/or options can be substantial. Each investor must consider whether this is a suitable investment. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.
This newsletter is not intended for dissemination to the public without prior approval from David Hall.
