Post Harvest Soybeans Offer Potentially Double Premiums for Option Sellers

Post Harvest Soybeans Offer Potentially Double Premiums for Option Sellers
Oct

12

2017

Post Harvest Soybeans Offer Potentially Double Premiums for Option Sellers

With Bearish Fundamentals Now Clashing with a Bullish Seasonal Tendency – Sellers of Options can Rake in Premium on Both sides of the Market

If you’ve followed our blog or the O.S.com newsletter for any period of time, you know that seasonal tendencies in commodities can be a great place to start when identifying premium collection opportunities.

Nowhere is this more true than in the grain and oilseed markets, where planting and harvest cycles can have a heavy (and at times predictable) influence on prices.

Soybean Harvester

The 2017 US Soybean Harvest is Underway


But blindly following seasonal tendencies carries risk. The underlying fundamentals driving these tendencies can shift, arrive early, arrive late or in some cases, not materialize at all.

This is why combining fundamental analysis with seasonal tendencies can be so powerful in commodities option selling.

This month, you’ll discover how applying these two tools to the soybean market could provide some hefty premium opportunities in Q4.

Harvest Time: Big Supply Expected

As you read this, the 2017 US Soybean Harvest is well underway. And despite weather fears earlier this summer, its expected to be a whopper.

The latest USDA Supply/Demand report surprised the bulls, who were betting dry weather in upper plains would hurt 2017 yields. The USDA disagreed, keeping US 2017/18 Soybean ending stocks at 475 million bushels – 8.2% above the average estimate of 439 million bushels . The estimate came, ironically, from the USDA increasing yield estimates to 49.9 bushels per acre from 49.4 in August .

The USDA also kept 2017/18 Stocks to Usage at 11.0%.

If these figures hold, they will represent the highest US Soybean supplies in over a decade. This paints a bearish fundamental landscape for soybean prices in the months ahead.

(***For an explanation of the importance of Ending Stocks and Stocks to Usage numbers in Agricultural commodities price forecasting, we recommend watching Michael Gross’s excellent short video on the subject.

US Soybean Ending Stocks vs. Stocks/Usage Ratio

2017/18 USDA Soybean Ending Stocks and Stocks to Usage are projected to be the highest in over a decade.


Demand has been sluggish as well. As of September 7, cumulative soybean sales stand at 27.7% of the USDA forecast for 2017/2018 (current) marketing year versus a 5 year average of 45.9%.

The Seasonal Contradiction

If you read our commentary here or online this summer, you saw our recommendations to sell calls on the soybean market during rallies. This was largely based on the fact that soybean prices tend to decline into the US harvest.


If these figures hold, they will represent the highest US Soybean supplies in over a decade.

Why? Because harvest is when supplies will be higher than at any time during the year. Thus, economics 101 dictates that when supplies are highest, prices will tend to be lowest. Thus, soybean prices tend to hit their lowest point during or immediately after the US harvest (Sept-November).

Soybean 30yr seasonal

Soybean prices tend to bottom during harvest, but then rebound as forward orders begin eroding inventories.


After that, however, a new phenomenon occurs. Forward sales orders begin to get filled and farmers being drawing down supplies again. This gradual filling of orders throughout fall and winter can often begin to draw soybean prices higher again.

This presents an interesting dilemma for option sellers. Do you blindly trust the seasonal and go long, laying out a string of short puts and banking premium? Or do you first consider the fundamental factors that underpin the seasonal?

The Answer to the Seasonal Dilemma

You’re going to get one of my most guarded trading secrets this month in regard to fundamental trading.

And it is this:

When fundamentals and seasonals align, you trade the seasonal.

When fundamentals and seasonals contradict, it can be an opportunity to strangle the market.

In 2017, the soybean fundamentals are contradicting the seasonal.

Conclusion and Strategy

We were “all in” soybean call sellers this summer, as weather speculators drove up call premiums in contrast to both bearish fundamentals and the seasonal tendency.

However, with the seasonal now reversing, a different course is in order.


When fundamentals and seasonals contradict, it can be an opportunity to strangle the market.

With the highest expected US supplies in over a decade, (Global supply remains burdensome as well), and a lackluster start to 2017/18 demand picture, soybean prices will face a drag for the next several months.

At the same time, forward sales will nonetheless begin in Q4. This has historically buoyed soybean prices and could serve as an effective counterweight to bulging supplies.

These balancing counterweights could present a lucrative opportunity for option sellers through the use of an option strangle.

An option strangler simply sells options on BOTH sides of the market , giving prices a wide latitude to move in either direction and relying on balancing forces to keep them from moving too far one way.

(***While not without risk, Option Strangles can be lucrative vehicles for investors when applied correctly. To learn more about using the strangle, watch our video tutorial at www.OptionSeller.com/Strangle )

After researching this market, it is our opinion that soybean prices could bounce either way, but will likely not venture too far from the middle based on these opposing forces.

We’ll be applying a variety of strangles and potentially “enhanced” strangles in managed client portfolios this month.

MAY 2018 SOYBEANS

Soybean Strangle


Soybean Strangle: May Soybean chart showing 9.00 put and 11.20 call.


Self directed traders can consider selling the May Soybean 11.20 call/9.00 put strangle for total premium of $1,000. Margin requirement per trade is approximately $1,600.

If options expire with May Soybean prices anywhere between 11.20 and 9.00, both options expire worthless. Based on current margin, this would result in a roughly 62% ROI on invested capital (minus transaction costs).

Based on current data, we would view that as a high probability.

For more information on managed accounts with James Cordier and OptionSellers.com, visit www.OptionSellers.com/Discovery to get a Free Investor Discovery Pack. (*Slots are limited. Recommended opening deposit US $1 MM)

  1. Hi OS,

    great article! really helpful. Thanks a lot for your blog. it gives a lot of useful information for me. i really appreciate your works and time.
    Could you kindly inform me how can i get your monthly newsletter please?

  2. Scott Wallace Says:
    October 12, 2017 at 7:48 pm

    Do you have old OS newsletters on your site? I would love to read some of your older articles.

    Thanks

    • Michael Gross Says:
      October 16, 2017 at 2:28 pm

      Scott,

      We do not post past newsletters, per se. However, most of the newsletter content eventually makes its way to the blog. I would recommend reviewing past articles and videos there.

      Regards,
      Michael

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