Grain Spreads: Wheat Strangle Suggested

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Grain Spreads

The grain markets again followed crude oil’s lead overnight with rallies continuing across the board in my view. The buying was verified by a spike in open interest, with corn up 45,000 contracts, soybeans up 7,500 contracts, and Chicago wheat up 10,000 contracts. Most interest in Friday’s morning trade was on the outside markets, specifically the energies as the US/Iran war extended into day 6 with no end in sight. Money continues to flow into the commodities as a safe haven in war time in my view, despite no real fundamental reason to rally for the grains and oilseeds. The USDA will revise its numbers on Tuesday’s WASDE release, but few changes are expected there; the bigger report date will be the March 31 Prospective Plantings and Quarterly Stocks quarterly release. Where do we go from here? No idea is my best answer into the weekend. Not to be Captain Obvious, but in my view, it will come down to how the conflict in Iran and the Persian Gulf evolve. Energies and Grains can run down as fast as it ran up. Something to consider for next week. The concerns over supply chain security in the Middle East, Black Sea, Red Sea and the Mediterranean is an example of key shipping arteries that can limit/stop the flow of grains, oilseeds and other food products/supplies. If prolonged delays and shutdowns are seen, it could have the potential to force buyers to seek other origins and that brings back in North America and South America for exports that can provide the foodstuffs for the above regions. This is a worst-case scenario in my opinion. Sunday night should be volatile as will next week. We are not staying here in wheat especially. But which way? Funds in my view are net long all three wheat classes for the first time in 3 years. My opinion is we aren’t staying here. Option strangle idea below.

Trade Idea

Futures-N/A

Options-Buy the April Chicago wheat 560 put/7.00 call option strangle at 10 cents OB.

Risk/Reward

Futures-N/A

Options-The maximum risk is 10 cents or $500 plus commissions and fees. I see this market due to the war extending near 7.00 in the spot May contract, or back down to 5.60, where the latest leg of this rally started. Risk 8 cents on a GTC stop. Offer the strangle at 36 cents to exit. 

Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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