This is a sample entry from Craig Turner’s weekly market analysis newsletter, Turner’s Take, published on August 29, 2012.
We have an interesting opportunity in a Corn futures butterfly spread this morning. For those of you who are not up to speed on futures butterfly spreads, please read this Daniels Trading blog article written by John Payne, the author of This Week in Grain.
- Buy 1 Dec 12 Corn
- Sell 2 July 13 Corn
- Buy 1 Dec 13 Corn
- At a credit of 110’0 or better GTC
- Risk: I think there is about 40 cents of risk in this spread if we go back to the highs of 150’0
- Reward: I think we could see this spread trade back down to 30’0 or lower. That would be a gain of 80’0 or more
- Time Frame: This is a longer term opportunity that we will most likely hold until at least after harvest.
- Margin: $2500 per spread
Now lets break down this butterfly spread (butterfly chart is chart #3)
- The first half of the spread is CZ12/CN13. That is trading around 18 to 19 cents (see 1st chart below). If the front month of corn gets very bullish again, say we trade $8.00 to $9.00, the Dec vs July will go in our favor. This spread however is not the main part of the trade. It is actually part of the insurance to protect us from a massive corn rally.
- The second half of the spread, and the more lucrative part, is the CZ13/CN13 (see 2nd chart below). July 13 is trading around 130’0 over Dec 13. This is a huge spread. Most years it does not get above 60 cents. In 1995/1996 it traded as high as 180’0. This year it traded as high as 160’0. These spikes higher all had to do with the drought rallies. It looks like the drought damage is done and those rallies are over. We may see higher prices but I seriously doubt we will see another situation this year when corn gains $2.00 in two weeks. As time marches on this spread should come back down to lower levels. If Corn does get very bullish again, we have the first CZ12/CN13 to provide some protection.
- The CZ12/CN13 protects us partially from a huge Corn rally. The CZ13/CN13 spread lets us take advantage of that monster spread coming back to normal. It creates a butterfly of long 1 CZ12, short 2 CN13, and long 1 CZ13. To see a chart of this spread please see the 3rd chart below. We want to see this spread head back towards 0’0. The main engine for this to happen is for the July 13 vs Dec 13 to come in from its lofty heights.
Chart 1: Dec 12 Corn vs July 13 Corn (1st half of butterfly):
Chart 2: July 13 Corn vs Dec 13 Corn (2nd half of butterfly):
Chart 3: Long One CZ12/Short Two CN13/Long One CZ13 (Full Butterfly):
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