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Commentary
A high volume but narrow-ranging session that struggled to choose a direction ahead of the WASDE report release on Monday at 11am central time. It is day 2 of the annual Goldman roll/rebalance and again the market was a two-sided chop fest which has become all too familiar for the last eight weeks or so. Rangebound continues in corn. Much of today’s session was spent getting final positions in place ahead of next Monday’s USDA data release in my view. This month’s WASDE is one of the most watched of the year as it contains final old crop production numbers. Trade is split in their opinion on the numbers, and this is generating a mixed trade. Conflicting weather reports and uncertainty over US geopolitics has added to market volatility. Last fall’s government shutdown delayed the analysis of the USDA’s objective yield data, raising questions about the reliability of the November estimate. Cash market strength in both soybeans and corn throughout harvest led many in the industry to expect a reduction in yields, leaving disappointment when the USDA made only minor adjustments in the November update. Who knows what the USDA is going to report on Monday at 11am Central. Every analyst I read has corn yield lowered at 2 bushels per acre on a revision, from 186 B.P.A. to 184 BPA. I have seen even further bullish cuts to 182. Average trade guess is 184 BPA with ending stocks at 1.980 billion bushels, slightly lower than last month’s 2.029 billion. If USDA doesn’t give the trade what they are expecting and come in near unchanged around 186 BPA, ending stocks likely come in back over 2 billion bushels and the algos sell may the corn aggressively post report and maybe for 3 days consecutive next week. Managed funds have narrowed their positions as of this past Tuesday with CFTC reporting a net short of just 16K contracts. In my view it speaks to the uncertainties that reign. Once we get past this report, I look for the funds to start to build a more aggressive position. We will not remain in this wedge for much longer as geopolitics, the future of tariffs, and weather in South America could dominate fund balancing. The option strangle is the way to go in my view for a report day play. Trade idea below.
Trade Ideas
Futures-N/A
Options-Buy the February corn 440 put/450 call strangle for 8 cents or better.
Risk/Reward
Futures-N/A
Options-We are buying 1 call and 1 put for a report day play. Risk 4 cents or $200 from entry. Maximum risk is 8 cents or $400 plus trade costs and fees but use a stop loss at 4 cents. Work to exit the strangle at 24 cents for a $1200 collection per strangle and a 16 cent or $800 gain on trade less trade costs and fees. This is just one strategy to play the report. The reason for a strangle is that we don’t know what the USDA will give us on report day and any potential reaction from it.
Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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Futures and options trading involves substantial risk and is not suitable for all investors. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. The information contained on this site is the opinion of the writer or was obtained from sources cited within the commentary. The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices.PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All information, communications, publications, and reports, including this specific material, used and distributed by Walsh Trading, Inc. (“WTI”) shall be construed as a solicitation for entering into a derivatives transaction. WTI does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71.
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