Grain Spreads: Wheat Strangle Discussed

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Commentary

President Trump did not provide anything ag specific in his State of the Union last night, but as the situation with Iran unfolds, funds will continue to careful manicure their short exposure. Wheat is still the main commodity that is at the mercy of geopolitical developments both in the Middle East and Eastern Europe. The potential reactions can be expected during the overnight or over the weekend trade. if the upcoming talks lead to little action in terms of toning down the chances of a US strike, this market stays bid. However, for the fund manager, being short at 515 May futures have limited returns versus reentering shorts at the 570 area.US wheat FOB values are not the 1st or even second cheapest wheat on the board, and the US has to divest itself of 900-million-bushel carry of supplies this year. Weather, and its potential impact on future yields and the initial cause of the short covering rally maybe shifting. The drought talked up in the Southern Plains is seeing the models bringing in rains for the 6-15 period. These rains have to verify however and wart premium may keep the market bid unless the politicos can make a deal. Regardless of direction I don’t see the market staying at present levels. I see a retreat back to the 530 are or a move up to 6.30 by quarters end. Option idea below.

Trade Ideas

Futures-N/A

Options-Buy the April Chicago wheat 550 put and April wheat 600 call strangle. for 12 cents OB.

Risk./Reward

Futures-N/A

Options-The maximum risk is $600 plus commissions and fees. I would put a stop loss at 8 cents or approximately $400 risk per spread plus commissions and fees. Offer to exit at 32 cents for a gain of 20 cents, less commissions and fees. 

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Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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