Commentary
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Futures were mixed in early trading today with grains favoring the downside and the soy complex seeing early gains prior to profit taking emerging on the close. The soybean complex continues to see the greatest volatility in the grain sector in my opinion. Much of it entered into the market this week and was based on President Trump's comments about the possibility of China buying another 8 million metric tons of soybeans for this 25/26 marketing year. This followed speculation that the market may see the U.S. EPA submit its final guidelines for the biofuel program to the White House Office of Management and Budget for review late this week/early next week. Soybean harvest is ramping up in Brazil, but domestic crusher buying is preventing soybeans from reaching export terminals. Brazil soybean sales are also light this year at 34% of expected production compared to the average 42.4% sales rate. End of week squaring up was more of a factor for today’s weak close instead of funds establishing new positions, especially with the Goldman Roll starting and ahead of next Tuesday’s monthly WASDE report. There is two ways to look at the bean market in my view. The additional 8 million metric tons if ever realized would send our domestic soybean carry out under 100 from 350 million bushels and would send old crop beans significantly higher from a demand perspective. The Chinese haven confirmed these additional purchases but haven’t denied them either. That said, we have another bumper soybean crop in Brazil that is starting to be harvested. Argentina will be harvesting their bean crop come early Spring. Globally there is a lot of beans coming to market. As of this post, we could see another significant move in beans and fast. We are not staying at the 11.10 to 11.50 area in May soybeans for much longer. We either in my view go back to where the market came from at 10.60 or make a run for 12.00 in my view. Option strangles are the way to go in my view for the next 2 months as uncertainty reigns for now.
Trade Ideas
Options-Buy the April 1060 puts for 4 cents. At the same time buy the May 12.00/13.00 call spread for 8 cents. Package the call spread and April put for 12 cents or better.
Risk/Reward
The maximum risk is 12 cents or $600 plus 3 commissions and fees per 3-way package. I would risk approximately 8 cents from entry on the 3-way strategy or $400 plus trade costs and fees.
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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