Farmers Have Options for Corn Futures, Analyst Says
Corn prices remain stuck in a range-bound pattern, with March futures trading from roughly $3.70 to $4.25 since late winter. When looking at an area where prices have spent the majority of their time (which is a more narrow price range), support is indicated near $3.75 and resistance near $4.10. The midway point is near $3.90, which has been traded in each of the last seven months. With a range-bound market, there may not appear to be much opportunity. Yet, you have the ability to look for opportunity.
One strategy to consider is a short strangle strategy. This is where you sell both a call and put. I suggest selling at-the-money. An at-the-money option will reflect the greatest amount of time value vs. an in-the-money or out-of-the-money option. The idea is that, if March corn futures prices remain range-bound, both options will lose value as time passes. This time erosion is a way to pick up value in a market that may be going nowhere fast. The most likely scenario for corn prices in the months ahead appears range-bound, as producer selling will increase, and adequate supplies will limit price rallies. When prices drop, producer selling will likely slow, which should support prices.
As of this writing, March $3.90 calls and puts are each trading near 18 cents. Option expiration is February 19. If, on February 19, March futures close at $3.90, both options will expire without value. It is, however, unlikely that corn futures will end exactly at $3.90. If futures do remain range-bound, the combined collected value of 36 cents could erode down to, let's say, 16 cents. At that time, should you buy back both positions at 16 cents, a gain of 20 cents (less commission and fees) would be experienced.
If you sold cash corn and futures prices drop, you could be exercised on the short put. Your breakeven is $3.90 minus 36 cents, or $3.54. You would be long futures on expiration date at a breakeven of $3.54 (less commission and fees). This could be your strategy to reown previously sold corn.
If corn futures rally and the short call is exercised, you would be assigned short futures at $3.90 plus your gain 36 cents, or break even at $4.26 (less commission and fees). Therefore, between now and option expiration, if prices do rally, you'd experience a gain in your unpriced inventory up to $4.36.
While the option straddle strategy is not for everyone, it is a strategy to consider. Be sure you understand the risks and rewards associated with any strategy you choose to implement.
If you have questions or comments, contact Top Farmer Intelligence at 1-800-TOP-FARM ext 129.
Futures’ trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.