TWIG Note – Tuesday Trade Update and New Recommendation

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

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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).

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).

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).

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.

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