Despite Weather Talk, Selling Calls Should Still be Solid Yield Builder in Supply Laden Corn
The Usual Weather Hoopla is Will Likely be Putting some Premium back into Call Options – a near perfect recipe for fundamentally focused option writers
(Note to Readers: Since the original publication of this piece (in the July Option Seller Newsletter) Corn prices have climbed over 10% on a weather rally, and subsequently fallen back again. As the December calls in the article are no longer viable, we suggest readers consider the March options on a secondary rally.)
You’ve likely heard the locker room fable of the two bulls sitting on the hill watching a herd of cows. If not, this is not the proper venue to repeat it. However, it has to do with walking vs. running, and the virtue of patience.
For summertime option sellers in the grain markets, patience is a virtue that can pay off in spades.
Summer is growing season for US crops such as soybeans, wheat, cotton and corn. That means weather reports– which can turn the US grain markets into open mike night for amateurs. Neophytes to the commodities markets love trading the news and summer weather makes great news. It also means call buyers galore.
Waiting for these fish to begin a feeding frenzy can line the pockets of serious, fundamentally based option sellers. But in the summer, you have to pick your battles. Knowing the score of the real fundamentals and seasonal tendencies can give you a big advantage over the newspaper traders. This month, the Premium Sniper explores such an opportunity in the Corn market.
Ending of Planting Can Mean Curtains for Corn Prices
At the time of this writing, the trade is already getting excited about drier weather in the western portions of the corn belt – even as substantial rains are predicted for bread and butter regions such as Illinois, Indiana and Ohio. This is, of course, noise. Weather changes daily and trying to trade weather is like trying to catch your shadow in a strobe light gallery.
There are years where weather can and does substantially reduce yields. But its rare. For the most part, the crop grows and comes in close to schedule. That’s why they plant corn in Illinois, Indiana and Ohio. In fact, prices have historically began to decline as the crop begins to emerge and then accelerate lower after successful pollination of the crop – typically in mid-July.
Bearish Supply Projections
This historical tendency, however, is unlikely to deter enthusiastic weather bulls. Reporters love writing about weather hurting the crop. Brokers and newsletters like to talk about it (it gets their customers excited) and brings more orders.
But the only figures that matter are the ones coming from the USDA. If there is crop problems, you’ll see what they are here. And right now, those numbers look bearish for corn.
As of the latest June USDA report, US Ending Stocks for 2016/17 are at their highest levels in over 20 years. This already gives the 2017/18 crop a bit of leeway. 2017/18 ending stocks, however, are projected at 2.110 billion bushels – only slightly lower than this year’s monster supply number. 2017/18 stocks to usage is pegged at 14.8% second highest since 2004/05.
2016/17 US Corn Ending Stocks sit at their highest levels in over 20 years. 2017/18 stocks are projected to approach these levels again.
These are the numbers that count – and they do not paint a bullish picture.
Weather Rallies and Selling Calls
Thus, both seasonals and fundamentals in the 2017 US Corn market appear bearish. Does this mean you run into the corn market right now and sell call premium? Not necessarily. That would be following the lead of bull #1. We suggest, at least in the summer, the potentially more lucrative tactic of patience, waiting for the right moment – like bull #2.
Just because fundamentals are bearish, it does not mean the corn market can’t experience periodic weather rallies during the summer – especially prior to pollination. In fact, it may be prudent to expect them. Such rallies are often accompanied by a surge in call volatility and thus values as hungry call buyers pour into the market on the latest news. These surges, however, are often short lived as they are most often based on pure speculation.
We advise waiting for such rallies in corn as opportunities to sell severely overvalued calls – with potentially fast time decay.
By using this patient approach, you position yourself not only for larger and potentially quicker profits. You also give yourself some protection in the event of a real yield reducing weather event. By selling on the initial surge, you can often sell the options on a surge in volatility. That volatility can often decline in the weeks after, even if the underlying price of corn continues to move higher.
Conclusion and Strategy
With longer term supply numbers appearing bearish and a seasonal tendency for lower corn prices into the fall, sellers of corn calls have the two top tenants of commodity option selling firmly in their corner. Summer weather has the potential to change the equation, but real damage to summer crops that causes any significant price move is rare. At the same time, summer grain traders can at times, sway short term prices on weather, creating opportunities for patient option sellers.
OptionSellers.com will view such rallies as opportunities for selling overpriced calls for the benefit of our managed client accounts in a variety of layered months and strikes.
For self-directed traders, we suggest using such rallies to sell deep out of the money calls. Keep an eye on the December Corn 5.00 call for premium increases into the $400-$500 range. The days immediately following a USDA report can be good times to look for such surges.
December 2017 Corn
Selling the December Corn 5.00 call option
Pontificators and weather chasers will be playing the game of predicting how today or tomorrows weather may affect 2017/18 crop yields. If they get bullish, they will start buying calls. These are the amateurs. They want to give you money. Be glad to oblige them and relieve them of their burden. The bonus is, everybody gets what they want – they’ll get a little Vegas action and excitement for the summer – however short lived, and you’ll get to keep the cash in the fall as part of your 2017 yields.
If not, you get out at your stops.
That’s how bull #2 plays it.
For more information on managed option selling accounts with James Cordier and OptionSellers.com, visit www.OptionSellers.com/Discovery for a Free Investor Information Kit. (Recommended opening deposit – US $1MM)