Jon Scheve with weekly market commentary made on June, 23, 2023
On Friday June 30th, the USDA will report on the number of acres planted and how much old crop remains in storage. Combine this with weather forecasts, and the next two weeks may provide the most important indicators of market direction for the rest of the year. Even though the information in this USDA report is important and could affect the market, price direction will continue to be most impacted by July weather. Market Action – 2 Sold Calls Sold Call #1 Throughout the winter months my straddle strategy worked well and provided some additional profit during a relatively sideways market. However, by mid-April I was concerned prices could drift lower into the end of June. Therefore, on April 19th when July corn was trading $6.40, I placed a trade to maximize profit potential if that happened. On 10% of my 2022 production, I sold a $6.75 July call for 11 cents. What Does This Mean? If the value of July corn on June 23rd is:
Above $6.86 – I sell futures at $6.75, but I keep all the 11 cents collected on the trade, so it would be like selling $6.86 futures.
Below $6.75 – I keep all the 11 cents and I have nothing additional sold.
Between $6.75 and $6.86 – I keep some of the 11-cent profit I collected when I placed the trade. The closer the price is to $6.75, the more I keep.
Why Did You Make This Trade? In mid-April, I was comfortable with all potential outcomes.
Prices go up - I would be happy selling 10% of my crop at $6.86.
Prices go down – I keep additional profit from the trade.
What Happened? On June 23rd, July corn was trading at $6.30, which was below the $6.75 strike price I sold the call for. Therefore, I let the options expire worthless and kept the 11-cent profit from the trade. Sold Call #2 By mid-May I was unsure if corn prices would continue lower, but I thought it was unlikely corn would trade above $6.50 again for another five weeks. Therefore, on May 15th when July corn was trading at $5.90, I placed a trade to maximize some profit potential if the market was sideways or lower. On 10% of my 2022 production, I sold a $6.10 July call for 11 cents. What Does This Mean? If the value of July corn on June 23rd is:
Above $6.21 – I sell futures at $6.10, but I keep all the 11 cents collected on the trade, so it would be like selling $6.21 futures.
Below $6.10 – I keep all the 11 cents and I have nothing additional sold.
Between $6.10 and $6.21 – I keep some of the 11-cent profit I collected when I placed the trade. The closer the price is to $6.10, the more I keep from the trade.
Why Did You Make This Trade? In mid-May, I was comfortable with all potential outcomes.
Prices go up - I would be happy selling 10% of my crop at $6.21.
Prices go down – I keep the profit from the trade.
What Happened? On June 23rd, July corn was trading at $6.30, which was above the $6.21 price I outlined in my plans above. Therefore, I let the options execute the sale on the July futures at $6.10. I still get to keep the 11-cent profit from selling the call which means it is like selling $6.21. Bottomline: Including these two trades with my previous straddle trades, I have made $2.17 per bushel profit on 10% of my production. Or the equivalent of over 21 cents on 100% of my production, while only selling 10% of my corn for $6.10 during that time. I don’t plan to make any additional option trades (calls or straddles) on my remaining 2022 corn crop. These trade examples illustrate how selling options can be a great way to increase profits. However, the recent futures volatility over the last several months shows why they must be done carefully. Farmers need to fully understand and be willing to accept all potential final outcomes if prices go up, down or sideways before placing these types of trades. They are not perfect and certainly do not work every time, but this year they have been a great addition to my trading toolbox. Next week I will highlight the USDA’s biggest report of the year and discuss the different carryout scenarios based upon this year’s crop yield potential and what that could do to futures values. Then in the weeks following, I will summarize where I finished my 2022 corn crop sales.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com
Comments