Highlights
A congressional delegation landed in Taiwan early Sunday morning to meet with Taiwanese leaders and discuss U.S.-Taiwan relations. China has not officially commented on the visit, but yesterday eleven Chinese military aircraft entered Taiwan’s air space as China continues military drills near the island that began before Pelosi’s visits. This visit could be a serious short-term negative for beans in the week ahead.
From a Kansas client last Friday:
I sold my corn for silage in the field for $35/ton which is a good price this year as forage and hay is very expensive. I calculated the yield to be about 50 bu/acre and hope it makes 12-14 tons/acre. Many people south and to the west of me throughout Ks., OK, and TX did the same thing. Could you address for all of us what the best method to retain ownership of the corn is and when to do that? Buying futures seems risky with the Taiwan situation but the time value on options always gets me as I am right in my prediction of the price direction, but usually it is after the time value ticks off of my options.
The lure of unlimited potential profit with limited risk for those who purchase call and put options is a very powerful influence on grain marketing and futures trading. Afterall, don’t we all want investments with limited risk and unlimited profit potential? And that is exactly what the buyer gets when he buys options.
Some studies have reported that 90% of all call options expire worthless. We won’t state that is absolutely true, but it very well may be true based upon how many people we have known to buy call options. There are several reasons that contribute to losing money when buying call options:
Futures prices usually go up much slower than they come down. That time value ticks away every day as the buyer of the call waits for the futures to rally. Even if the futures rally, the time value still ticks away every day.
People who buy options want to keep the risk to a minimum. That is why they buy options. That risk aversion attitude carryovers over into how much they pay for an option. Just 20 cents a bushel is a thousand dollars! Take a look at corn call options as of the close Friday. The December 2022 $7.20 call option is priced at 19 cents and the $7.10 call is at 21 cents with December corn at $6.42. Now, do the math. December corn has to be above $7.39 on expiration day to make any money at all with the $7.20 call. That means December corn has to rally 97 cents to break even! Some years corn futures do not even move a dollar during the whole year.
Most people like to buy calls when the market is rallying. Heck, we all want to buy something going higher. The “trend is your friend” and “go with the crowd” and “follow the money” and buy “courage calls” when a farmer sells cash grain are frequent reasons given for buying high priced call options. In a volatile, active market, the time value of calls is exaggerated and, thus, the value is more costly.
Even if one buys a call, he still has to sell it. We all want to hit the top. No one wants to make 20 cents and leave 80 cents on the table. The problem is we cannot see when the market will turn lower and, when it does, we think it will recover in a day or two. Three weeks later, we are still hoping the market will recover. Two months later, we are wishing the price would recover. By then, the option value is so low, the owner has very little to lose by just hanging on to it.
Time value is so expensive, buyers tend to buy options with earlier expirations, so the option expires. Roger had a client who paid $8000 for two soybean options with and expiration 15 (or was it 27?) months away. Why did he “waste” so much money on time value? He figured that within 15 (or 27) months, soybean futures surely would rallv enough he could make money with July 2021 $8.80 calls and he really wanted to make money on his first options or futures trade. He more than doubled his money in five months, but he left $5+ a bushel on the table... That would be $50,000, but he made more than a dollar a bushel!
Like grain in the bin, call options never call you on the phone to remind you that last week your calls lost $1800. Buyers of options have a false sense of security. After all, they know they will never have a margin call, and that is the reason they are trading options instead of futures. The fear (concern) of a margin call makes futures traders very watchful of the market. Call option and grain in the bin owners don’t realize it, but think they are bullet proof until it is too late because they will never have to make a margin call.
How does one improve the probability of making money trading options?
Buy at-the-money call options. Yes, more expensive, but much less risky. The $6.40 December 2022 corn call is 40 cents. It costs twice as much as the $7.20 call, but December corn only has to be 38 cents higher on expiration day to breakeven. Which is more risk: 40 cents invested and need 38 cent futures gain to breakeven or 19 cent investment and need 97 cents futures gain to breakeven? Not always, but most at-the-money corn calls make some money and most 80 cent out-of-the-money corn calls lose money.
Take small profits. Spend 40 cents for a call and sell that sucker when you can make 20 cents. Don’t go for the home run or the top. How many times will corn go up and down more than 30 cents between now and late November? Several. If you make just 15 cents three times, that is 45 cents a bushel. Do that for a year and make an easy $1 a bushel every year.
Buy calls when everybody is selling the futures. Know the facts (fundamentals, technical, seasonal trend) and have the courage to buy when very few others are buying. Friday afternoon (August 12, 2022), after a bullish USDA report, December corn futures were down 11 cents because beans were down 41 cents. Yet, December corn closed 14 cents higher. Who had the courage to buy a corn call (or futures) when the market was down on bullish news and beans were down 41 cents?
Write puts instead of buying calls. Yes, you have a chance to get a margin call. Yes, your profit potential is limited. Yes, your loss potential is unlimited. But if buying calls is not making you money, by definition (and common sense), writing puts will make you money.
Options are so ridiculously over-priced for all of the above reasons, so why buy them? Sell options before you buy them, that is called “writing” options. If you think the futures price will go up, write an out-of-the-money put instead of buying a call. If futures go up, you keep 100% of the premium. Makes money as a purchased call option.
If futures trade sideways, you keep 100% of the premium. Purchased call loses 100% of investment.
If corn futures go down 20 to 40 cents, you still keep 100% of the premium. Purchased calls lose 100%. Example:
The December $6.00 corn put is worth 22 cents as of Friday with December corn at $6.42, more than a thousand bucks. Write it. Twenty-two cents ($1100) come into your options account.
On expiration day, December corn can be 42 cents lower and you will still make 22 cents. Dec corn could be 64 cents lower and you will still break even! Is it possible December corn will be below $5.78 in late November? Sure. Obviously a purchased all would also lose money. The low this summer is $5.62. But the December futures market is 80 cents above the low for a reason.
Now that we are in the middle of August, the corn crop is not going to get any bigger. With the sell-off from $7.66 in May to the $5.62 low in July, what do you think demand did? Get worse? Of course not! In June and July, we were not selling much of anything abroad. The past few weeks, China has bought a bunch of corn. Unknown has bought a bunch of corn. Mexico has bought a bunch of corn. Italy, for crying out loud, has bought over 100,000 mt of US corn! When was the last time US sold corn to Italy?
Did you know it is a little dry in Europe? Like maybe a 500-year drought?
Did you know there is war in the country which is world’s #4 corn exporter?
Did you know a drought and terrible government fiscal management is wreaking havoc in the world’s #3 corn exporter?
Sure, The Tech Guy thinks corn and beans will go to the moon and the rest of us here at Wright on the Market expect to see a substantial rally to possibly test the summer highs yet this year. But what is a safer investment: Paying 20 cents and needing corn to rally $1.17 to make 20 cents or expecting corn to be above $6.00 in November to make 22 cents? Or at $5.80 and still make 2 cents?
Without a doubt, our clients who buy calls, as a group, are consistently the most frequent losers.
Buyers of puts do much better than buyers of calls, but one has to be patient to buy the first put and stubborn as a mule to keep buying on stair-step up higher strike price puts at the same cost as the first put.
But the most consistent, by far, profitable option traders, write puts when they think the futures market is oversold, buy ‘em back at a modest profit or write short dated puts and let them expire worthless. Likewise, write calls when they think the futures market is overbought and take a modest profit at the first opportunity or write short-dated calls and let them expire worthless.
When the futures market is in an uptrend, write puts on down side corrections. When the market is in a down trend, write calls on an upside correction. Both are very safe.
For most of you, writing options is quite confusing. Our website has a lot of options educational information. We suggest you start with:
The map of rainfall amounts for 24 hours ending yesterday morning:
Market Update
This morning:
Crude oil is at $91.07, down $1.02
The dollar index is at 105.82, up 0.19
December palm oil is at 4,318 MYR, down 114. The contract high was made April, 29th at 6,384 MYR. Palm oil owns 36% and soybean oil owns 28% world market share.
December cotton is at $113.59, up $5.00 per cwt. The contract high was made May, 17th at $133.79 per cwt. Cotton competes with soybeans and corn for acres.
December natural gas is at $8.803, down 0.124. The contract high was made June, 8th at $9.675. Natural gas is the primary cost to manufacture nitrogen fertilizer.
December ULSD is at $3.3862 per gallon, down 0.0139. The contract high was made June, 17th at $4.0719. ULSD stands for Ultra Low Sulfur Diesel.
September Dow Futures is at 33,637, down 81. The lifetime high is 36,832 on January 5th, 2022.
Rain Days Update
The Western Corn Belt has 3 less rain days in the 10 day forecast than yesterday and the Eastern Corn Belt has 7 more rain daysthan yesterday.
The 6 to 10 day forecast updated every day at: https://www.cpc.ncep.noaa.gov/products/predictions/610day/
Explanation of Rain Days