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Home / Futures Blog / TWIG Note – Tuesday Trade Update and New Recommendation

TWIG Note – Tuesday Trade Update and New Recommendation

July 21, 2015 by John Payne

This is a sample entry from John Payne’s newsletter, This Week in Grain, published on Tuesday, July 21, 2015.


Happy Tuesday! I have a new trade idea in corn posted below but before I get there I want to recap the KC-Chi wheat trade we are currently following.

If you took the recommendation last week, you should be in somewhere between 8 and 10 cents KC under Chicago. The spread is slightly moving our way with the last traded price around 5 cents under Chicago. I expect this to pop at some point as funds look to roll out of September positions, probably sometime during the first few weeks in August. I feel pretty good about the price action thus far, with the Chicago wheat harvest picking up over the last two weeks. Forecasts look good for the finish in coming days. If the gods would shine on this, I would be happy with a profit of around 30 cents near the 20 level (KC over Chi).

twig-note-chart1

STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION.

The next trade I will look at as one big package, but I will explain it in two trades. I want you to look at it that way because it contains two assumptions:

Trade 1: Selling the Sep corn 395 straddle (futures are trading at 408 as I write this), collecting 30 cents.

Trade 2: Buying the Dec corn 380 put for 10 cents.

  1. Corn will chop sideways to slightly lower over the next 30 days as the funds wait to see what the September stocks report and final planted acres are before applying their full harvest short position. I like selling the 395 straddle vs collecting more money at the current levels because I think we will see more physical old crop grain for sale before the harvest begins.
  2. I believe the acreage is there and the yields will be on or just above trend. This is certainly debatable but if I’m correct and the carryout would stay where it is right now, which should push prices back toward where they were near harvest last year (320 Dec)

Looking at Trade 1, if I am correct and the market would chop sideways to lower over the next 30 days and expire on 395, we collect and keep all 30 cents from the straddle sale. Every penny the market falls or rallies from 395, we will lose a penny from that 30 cent collection. The breakeven for the trade would be below 425 sep corn and 365 Sep corn. Keep in mind that doesn’t include the cost or return on the Dec put (trade 2).

twig-note-chart2

WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED.


WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED.

Trade 2 will exist for 90 days longer than trade 1, and is pretty self-explanatory as a put position. It will basically act as a floor for corn prices after the Sep trade expires but it will act as a support to the Sep trade in case prices would fall out of bed back toward the spring lows in the next 30 days. This is good for speculators but bad for hedgers. The specs should come out pretty well on a move lower, especially if it would come toward the middle part of Aug. Hedgers wouldn’t be happy though because their grain wouldn’t be protected as the Dec put will be busy protecting the losses on the Sep straddle (only if those losses would come from a lower move).

twig-note-chart3

On the flip side, if prices would rally in September, we would lose on the put position. This is good for the hedgers as they would have grain to sell but bad for the speculators as if we would rally back above 430 on the Sep expiration (8/22) we would be losing on both trades. I don’t foresee corn making that kind of move, this sell off has had a small scarring effect and I think we will see rallies sold if conditions would stay as is, and the weather outlooks would support that. The specs have not been interested in buying grains at harvest over past seasons.

I hope your brain doesn’t hurt too much, the option source charts above are there so you can get an idea for what would happen to the account balance if prices go to a certain place at a certain time.

Here is the trade in its entirety. Selling 1 Sep corn 395 put, Selling 1 Sep corn 395 call, and Buying 1 Dec Corn 380 put- Collecting 20 cents before fees.

I know this is confusing, so if you have any questions please call me or email me directly and I can explain more about margin requirements and risk. This trade does involve being short a call so risk is unlimited on that side of it.

This Week In Grain

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Risk Disclosure

WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED.

WHEN SELLING OPTIONS, YOU MAY LOSE MORE THAN THE FUNDS YOU INVESTED.

STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION.

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

Filed Under: This Week In Grain

About John Payne

John Payne is a Senior Futures & Options Broker and Market Strategist with Daniels Trading. He is the publisher of the grain focused newsletter called This Week in Grain, along with being a co-editor of Andy Daniels’s newsletter, Grain Analyst. He has been working as a series 3 registered broker since 2008.

John graduated from the University of Iowa with a degree in economics. After school, John embarked on a 4 year career with the United States Navy. It was during two tours in Iraq and the Persian Gulf where John realized how important commodities are to the survival of society as we know it. It was this understanding that brought about John’s curiosity in commodities. Upon his honorable discharge in 2007, John’s intense interest in the world of commodities inspired him to move to Chicago and pursue his passion in a career in the futures arena.

After a three year position with a managed futures firm specialized in livestock trading, he was given the opportunity to join the team at Daniels Trading. Being in the business and seeing how other IB’s operated, it was the integrity and straightforward approach of the Daniels management team and brokers that attracted him to make the move. Since joining Daniels, John has broadened his fundamental and technical analysis of the markets even further. John has been writing his newsletter This Week in Grain under the Daniels banner since 2011.

Working in high pressure industries like the military and capital markets, John has learned the value of preparation in times of stress. He believes that instilling within his clients the value of a good plan and a cool head for dealing with the day to day swings of commodity markets. He treats every client as a teammate, understanding that his job is to help clients achieve their goals, whatever they may be.

John is a proud supporter of the Iraq and Afghanistan Veterans of America, the Veterans of Foreign Wars and the National Corn Growers Association. When he is not working, he enjoys athletics of all kinds and spending time with his wife and their two kids.

John’s commentary is featured in the following publications:

* All Ag Radio – Sirius Channel 80
* AM 880 KRVN – Lexington, Nebraska
* RFD TV
* Wall Street Journal
* Barron’s
* China News Daily (English version)

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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