Call Sales are Still a Cash Cow in Supply Burdened Soybeans
Despite a recent dive in prices, the fundamentals should keep bean prices struggling for some time
Buy low and sell high. It’s the cornerstone philosophy of investing that has been pounded into us since we looked at our first price chart.
New converts to commodities, however, learn that selling high and buying back lower can be just as easy – and just as (if not more) effective in these versatile markets.
When one adds option selling to the mix – both of these concepts go out the window. We stop caring about buying low AND selling high. We don’t really care if a market is at a high or a low.
Thus, while many of the articles you read here discuss markets in which there is a “bullish” or “bearish” fundamental outlook – whether the price of that commodity moves up or down is technically irrelevant. If you are selling a call because you believe the market is “going down,” you’re missing the point.
It doesn’t have to “go down” to make money for a call seller. It just has to not go way way up. There is a big difference there. The reverse is true for the put seller. You don’t need a bull market to make money as a put seller. You just need there Not to be a crash.
For put selling then, you seek out markets that are least likely to crash. For call sellers, you seek out markets least likely to experience a sharp rally.
Which brings us to the soybean market.
The novice may look at a soybean chart and think “this market has just taken a nose dive. Why would I want to sell it now?”
An experienced option seller may look at it and think “This market has sold off for some very strong fundamental reasons and is unlikely to recover any time soon. It could be a stellar market for collecting call premium.”
Soybean prices have sold off sharply this spring. As with most significant price moves, there are some powerful fundamentals behind this downtrend. Whether prices continue to trend lower remains to be seen. However, for markets like this to rally, it typically needs some good reasons. At this time, the soybean market has few. Thus, despite the recent sell off, it becomes an ideal candidate for call selling.
Why did Prices Fall?
Soybean prices declined this spring largely as a result of a second mammoth year of South American production. Because of this, 2016-17 Global Soybean Ending Stocks will hit a record of 90.14 million metric tons -while 2017/18 stocks are expected to be the second highest on record. The onset of Brazilian and Argentine harvests in March served as a catalyst for selling and bean prices responded in turn.
World Soybean Ending Stocks will hit a record for the 2016/17 crop year and are expected to remain burdensome in 2017/18.
The global supply glut was enough to usurp what is generally a supportive time for US soybean prices. US planting season has historically brought at least some form of weather premium into the market – firming prices at least until the crop is “in the ground.”
Once planting is completed, it is not uncommon to see anxiety exit the market, and prices have often responded accordingly as the seasonal average chart below illustrates.
Historically, soybean prices have tended to decline one the US crop has been planted.
US Planting Moves Ahead
This year, however, has seen quite the opposite. Why? On top of the global supply glut, US farmers are planting a record 89.5 million acres of soybeans this year.
US Soybean planted acreage will hit a new record in 2017.
There is been little concern over planting weather thus far in US growing regions. As of the latest USDA crop progress report, US soybeans are 32% planted, right where they should be for this time of year – according to a 20 year average.
The result of this increased acreage? Assuming an average yield of 48 bushel per acre, 2017/18 US soybean production would hit 4.255 billion bushel – with Ending stocks hitting 480 million bushel – the highest in over a decade. Stocks to usage at 11.3% would also be the highest since 2006.
2017/18 US Soybean Ending stocks are projected to hit the highest levels in over a decade.
With US production contributing to overall global supply woes, the price picture does not look fundamentally bullish for soybeans.
Sporadic rallies can happen in any market and it would not be surprising to see some off of weather news as the US Summer progresses. However, the burdensome global supply picture should keep a lid on any rallies.
Our opinion is the risk of a breakout move is much more likely on the downside. The USDA is assuming an average yield of 48 bushel per acre. But 2016’s crop yielded a whopping 52 bushel per acre. While USDA credits ideal weather for the robust yield, OptionSellers.com believes genetic engineering and more efficient fertilization techniques will make 50+ bushel yields the norm in the coming years.
Should 2017 yields hit last year’s levels, US ending stocks could soar well over 500 million bushel – further exacerbating the oversupply issues.
Conclusion and Strategy
With global ending stocks at record levels, 2017 US planted acreage at record levels, a healthy start to US planting and a strong seasonal tendency to the downside in coming months, it is our opinion that soybean prices will have a hard time staging any kind of sustained rally in the months ahead.
Despite the recent sell off in bean prices, we feel that call sales will continue to be a high yielding cash cow for investors this month.
We will continue to position managed accounts in this market as the situation dictates.
For traders going it alone, we suggest considering selling the November 11.60 calls for premiums of $500 or better.
November 2017 Soybeans
Selling the 11.60 call
The market is oversold and rallies are possible this month. Such rallies can be treated as opportunities for selling additional calls at strikes of 12.00 or above.
If the 2017 crop comes in at even average USDA yield projections, prices could fall well below 9.00 per bushel by harvest.
Have a great month of premium collection and I’ll be updating this market in the bi-monthly vides.
For more information on managed option selling accounts with James Cordier and OptionSellers.com, visit www.OptionSellers.com/Discovery for a free Investor Discovery Pack. (Recommended opening account allocation US $1 MM)
James Cordier is president of OptionSellers.com, a wealth management firm specializing exclusively in managed option selling portfolios for high net worth investors. His book, The Complete Guide to Option Selling has been featured by CNBC, Bloomberg News, Fox Business, Barrons, Forbes and Morningstar Advisors.