Options Update: Corn Strangle
Scott (@ScottTheCowGuy) explains how a strangle works; using both a put and a call at the same time.
I'm Scott solely the studio over brokerage here in the CME Group Floor in Chicago on Wednesday again my favorite day didn't argue all. For six of the -- magazine and agriculture dot com. Last week we touched on options but I'll read a rewind melanoma goal billion -- update. But let's first hardware -- the markets were today we've got a corn. Again having -- on the view set up about a half we had we market above seven minute quarter and the beams. The ones that are taken -- here a little bit down about thirteen there today after two records and it was a file. Well why is that the case you don't have the weather's been fantastic at the jobs you look at a chart which -- made its move. We sold so we today we bottoming out of tad. At the end of the day this weather has been so. Former a -- up to be a good year and that's when things got. More more pressure coming on that being from -- being murdered as we get through August here. There has been some hot dry weather issues that have kind of kept things imbalance that had but I still do think we could take the -- while being likely already have that -- market. Let's talk about that core market let's go back to that options won't -- class. And make it basically very simple but last week we talked about a strangle. We sold a downside put an out of a lot of doubts that put the 350 puts in December corn. And we sold them out of the money upside call before dollar calls. And the summer quarter we talked that that was trading at around twenty and a half cents for the two combined. And to make it easier said around twenty cents is what you really. Stand to make that trade so that puts your breakevens. At 330. And -- -- You'll make money on that traded -- in between -- zero reduced to 330 U zero enforce wanted to anywhere in the middle. You're going to be making some money so what happens when we -- strangle like that always were looking for no real big movement in the market would do for ball -- be ticked off. Because we technically just sold to out of the money options and an expiry out of money options have. A value of zero. So for all -- the purposes of let's just say we sold. The 350 puts a time on the street fifty of the four dollar calls that time it was a twenty we talked about last week and now. If you look at the settlement prices today -- settled around seventeen and half. So. Were already making two and a half to three cents on this trade just by sitting here on this court market if you look at the price today. It's about the same as it was last week when I was talking to owners sit in this chair. Well that really just tells us that we've had not come a time -- But more volatility coming off as the expectation for big move. And the corn market comes out of that comes out of the price of those options so less of an expectation. And a big court move is good for those who have sold options first. And hopes of buying them back cheaper later or if at all they might just let them expire. At zero so that's a good example of what can happen when volatility comes out of the market. You've probably had that happen to be no longer call. And we rally and -- call should be gaining in price and it just doesn't kind of get the traction -- thought it should. Because it was a hedge against something your short or you thought of those calls relation of exploded honorably. But they didn't explode because what happens is that we sometimes come into a situation we've got a lot of calls sellers and rally those or long. So all their calls. But in doing so they -- option volatility is more options sellers and buyers -- the market's rally. And that can kind of depressed the price of a call if you look at it. It's really just like each strike is its own mini market you could have more buyers and sellers went straight in and dollar and that will push that strike up in volatility level. Vs the Maxtor expects to that's the distinct thing about this place so here we sit. A week later in your party made about three cents on the straight and if we continue to sit at this level on 37 years 375 inch. That that strategy will continue to pay you until we come to expiring which I believe is at the end of November. So having it be basically the first of August. We've got a three months of sit through to make another seventeen cents. Out of all of the customer would like to do that because that's a long time like seventy cents but I guarantee you if it comes into about. Eight or 96. Or seven. The start to see some profit taking and take those shorts off the market so again here we -- -- one week we're up three cents on selling a struggle out of my call. And probably put. For twenty habits cents I think today it's over so -- have -- in three quarters good example of market has moved not a lot of time indicated take on this -- so far away for expiration it's an example of volatility coming out of the market. More sellers about options because they don't believe we're gonna move anymore and moves over that buyers about options the prices are just naturally depressed. That is a good example of volatility of the market so. Hopefully we get -- has -- that we'll talk about that again next week. -- -- about it too much but it's an industry one and it's an easy one to see and it's actually take place in real time in real life right from our -- That's it for me this week let's temperature to penetrate we'll talk a little more macro stuff but next week as well. But that I -- -- before our struggle as some in the wanna -- via in the quarter market. I'm discussion only for -- refer over here embassy reforms in Chicago forcing all again next week. I'm here for six as a from a magazine and agriculture background. And let's see if we get another good probably -- to about and a good start to walk --