Bearish Wheat Presents High-Odds Playing Field for Call Sellers
Record Global Ending Stocks Make Out of the Money Call Strikes look Expensive – Despite Volatility
While selling options on commodities contracts may sound like an exotic and/or glamorous investment strategy, in reality it’s more show up for work and follow a formula.
The Formula is called FUDOM* and its steps are simple:
- Find a Market with Clear Fundamentals – Bullish or Bearish
- Sell Deep out of the Money options against those fundamentals
- Force the Market to Make a huge move against those fundamentals during a certain time period – if it can’t do it, you take the premium home.
(*To learn more about the FUDOM method of selling options, visit www.OptionSellers.com/FUDOM )
If it was a football play, it would be the fullback up the middle for 5 yards.
Over and over and over again. But executing those types of plays continually and safely throughout the year can pay big dividends at years end.
You don’t have to find the perfect opportunity. You don’t have to scan and search and filter for “overvalued” or “undervalued” markets. You don’t have to figure out something “nobody else knows.” Simply take the information already available and apply a high odds approach to it.
With those criteria in mind, our mid-market update presents to you this month, the Wheat market.
The Bear in Wheat
Wheat is a commodity whose fundamentals appear decidedly bearish. These fundamentals will likely be a burden on price for much of 2018, making wheat a prime candidate for call sellers. What are these fundamentals? The 3 with the biggest impact on price are covered below.
Top 3 Factors Affecting Wheat Price in 2018
1. Global Ending Stocks are Highest in History:Due to bumper crops across much of the wheat producing world (thank rapidly improving genetically modified crops), global ending stocks are expected to balloon to 268.02 million metric tons in 2018 – the highest in recorded history. Global stocks to usage will also hit a staggering 36.1% in 2018 – also a new record.
2017/18 will show the highest World Wheat Ending Stocks in History
2. US Wheat Ending Stocks at Second Highest Level on Record:While down slightly from last year’s record numbers, US wheat ending stocks will still record second highest levels on record at 989 million bushels. While not a record, a 2017/18 stocks to usage figure of 47.4% reflects extremely high supplies and should be a burden to prices throughout the year.
(For our video seminar on the importance of ending stocks and stocks to usage numbers in grain price forecasting, visit https://www.optionsellers.com/agriculture )
2018 is expected to show the 2nd highest supply on record for US wheat and a burdensome stocks to usage number.
3. Seasonal Fundamentals are Weak:
Wheat prices have historically tended to weaken through the US Spring planting season.
Unlike it’s cousins, corn and soybeans, wheat prices seldom benefit from the planting season price anxiety often seen in the US Springtime. Why? Because almost ¾ of the US wheat crop is winter wheat which is planted in the fall. Therefore, when traders and farmers are wringing their hands in March and April about weather conditions and how fast or slow their corn and soybean crops are getting planted – 75% of the wheat crop is already in the ground. Thus, the market tends to take its price cues from the newly harvested supplies leaving the shores of such exporters as Australia and South America. Historically, this has kept pressure on wheat prices during the US Spring.
Conclusion and Strategy
The combination of massive US and Global wheat supplies has kept wheat prices under pressure in the second half of 2017. The problem for wheat is, these fundamentals are unlikely to change anytime soon. It takes awhile to work through that much of a supply backlog. Further confounding the wheat bulls is the upcoming seasonal tendency for weaker wheat prices in the Spring.
December 2018 Wheat
Selling the December 6.00 Calls in Wheat
Does this mean that wheat prices can’t rally? Of course not. Markets can rally for a variety of reasons – often in the face of contradictory fundamentals. What it does mean is that a substantial, sustained rally is unlikely. The burdensome supply outlook will likely mean heavy commercial selling coming in to stifle any technical rallies .
We’ll be watching the wheat market for appropriate times and strike levels to sell calls for our managed accounts this month. Self directed investors can look to sell the December Wheat 6.00 calls on rallies. Look to take premium of at least $450 – $500 per option. Margin requirements are approximately $1,100 per option.
While volatility levels in wheat options have been subpar, that hasn’t mattered for call sellers. Clear, long standing fundamentals can trump volatility for months or even years at a time. If you’re an option seller, don’t overlook taking wheat call premium simply because its volatility numbers don’t show calls to be “overpriced.” If the fundamentals can’t take the price there, the option is worth 0. That would make any premium at all overpriced.
Have a great month of premium collection and we’ll be updating other markets in our February newsletter.
For more information on managed commodity option selling portfolios with James Cordier and OptionSellers.com, visit www.OptionSellers.com/Discovery to request a Free Investor Information Pack. (Recommended Investment US $1 MM)