Taking Cash Off the Cob in Corn

Taking Cash Off the Cob in Corn
Apr

25

2018

Taking Cash Off the Cob in Corn

Corn is a market with strong seasonal tendencies. Here is how you can take advantage of them this month

While it may not seem like it to those in the North, summer is just around the corner. It won’t be long before the barbeque grills fire up and we’ll be eating fresh corn on the cob.

Option Sellers, however, may not need to wait that long to get their fill of corn goodness. Corn prices are some of the most seasonal in commodities. Knowing the seasonal and why it occurs can be a powerful tool in an option seller’s arsenal.

With fundamentals appearing on normal seasonal footing this year, the market now appears to be setting up for a high percentage option write . To learn how to put some of this premium in your picnic basket this spring, read on.

Corn – Time of the Season

Corn prices, like many US agricultural markets , tend to build a “weather premium” during spring planting season . A year where weather is not considered “too dry” or “too wet” for planting is a rarity. And yet, the crop always seems to get planted.

Historically, prices have tended to rise during the period of planting anxiety (March-May.) Once planting wraps up, typically some time in late May to Mid-June, the market has tended to breath a collective sigh of relief. Prices have reacted accordingly. The seasonal chart below illustrates this price pattern.

GRAPH: Dec Corn 15 Yr seasonal

Corn prices have tended to rise off of weather anxiety during springtime planting. However, as planting nears completion in late May or June, prices have tended to fall back down again as the weather premium drains out of prices.


Bullish Fundamentals?

2018 is shaping up to be a typical weather year. This year is leaning towards the “too wet” argument with planting running behind due to late season winter storms in the Midwest. As of the latest USDA report, US corn plantings are 5% complete, compared with a 5 year average of 15% complete for this time of year.

Tractor planting corn

US corn planting is off to a slow start this year.


This, combined with the fact that US corn farmers intend to plant 2 million fewer corn acres this year, has the bulls talking reductions and shortfalls and all of the haughty talk that comes with it.

But corn prices have largely reacted with a “ho-hum.”

Why is this?

Corn Prices – Why No Alarm?

It is said that on any given day, a commodity is priced at exactly the level it should be.

With lower acreage and planting behind schedule, why aren’t corn prices enjoying of wild bull rally?


Several reasons .

1. Corn prices have already rallied nearly 10% since the beginning of the year – largely on expectations of lower 2018 acreage – but also as a normal seasonal price swing (see section above).

2. The headline is “2 million fewer corn areas.” However, in actuality, this only represents a 2.2% reduction from last year.

3. Planting is running slightly behind. But it isvery early in the planting cycle. Midwest weather for the next 2 weeks looks warmer and drier. It doesn’t take farmers long to make up lost ground when the weather turns favorable.

4. 2018 Beginning stocks will be large: The 2018/19 crop year will begin with leftover stocks at theirsecond highest levels in over 20 years2.182 million bushels (mb). This provides quite a bit of cushion for shortfalls in the 2018/19 crop – should there be any.

5. It is unwise to discount seasonal price tendencies – regardless of existing supply or demand.


GRAPH: US Corn Ending Stocks

The 2018 crop year will begin with the second highest carry over stocks in over 20 years.


Conclusion and Strategy

Will additional planting delays or acreage reduction drive corn prices higher from here?

Possibly.

Traders WANT to buy this market – especially with the attractive headlines of slow planting. Its even possible we could see lower ending stocks in 2018/19. A little more weather talk and a slight nip to acreage in the next report and corn prices could adjust higher.

We just don’t see them adjusting substantially higher.

And that’s the play for the option seller.

Regardless of what happens next month, the 2018 crop will get planted . Unless we have a complete disaster over the next 30 days, assuming average yields, 2018/19 production will likely be less, but not substantially less, than 2017/18. Combined with gigantic beginning stocks, we feel this will be enough to prevent any blow off rallies this year .

Thus, if you want to capitalize on overzealous buyers right now, look for 10-20 cent rallies over the next 30 days as opportunities for selling deep out of the money calls in corn.

DECEMBER 2018 CORN

GRAPH: December 2018 Corn


Selling the December Corn 4.70 call options


We’ll be working to position managed portfolios on rallies next month. While we recommend self directed traders doing their own research on strikes and stops, selling theDecember Corn 4.70 call may be a good place to start.Look for a May rally to drive premium to $600 or better for an optimum sale.

A successful start to growing season should bring fast time decay to distant calls. Such an outcome could have you taking your profit long before the barbeque grill gets put away.

Happy husking!

For more information on managed option selling portfolios with James Cordier and OptionSellers.com, visit www.OptionSellers.com/Discovery for a Free Investor Information Pack.

  1. Nicolas Bleier Says:
    April 26, 2018 at 12:10 pm

    Dear James and Michael,

    Thanks for writing such an interesting book and for sharing your views on the markets every week.

    Rgds,

    Nick

  2. I am confused. The Corn DEC18 futures contract for the 470 calls (you say 4.70?) are trading 11.625 bid offered at 11.875. I am looking at the wrong thing?

    • Michael Gross Says:
      April 30, 2018 at 2:00 pm

      Michael,

      That is exactly right. Commodities options are priced in points or cents. Corn is priced in cents per pound. A contract of corn is for 5,000 bushels of corn. Thus, every cent move is times 5,000. A corn option priced at 11 cents is thus 11 x $50 = $550. For a list of all point values in commodities, you can either google commodities point value charts or consult The Complete Guide to Option Selling where you will find all point values listed.

      I hope that helps.
      Regards,
      Michael

  3. Fred Cook Says:
    April 25, 2018 at 4:03 pm

    Great comments and insight. Thank you

  4. Well, this is really timely James!

    You just fully answered my question that I posed to Michael a couple of days ago on your April 10 blog on Seasonal Tendencies. His answer was very good, but you just presented the case why you are favoring the seasonal over the bullish sentiment surrounding corn.

    Excellent, this is exactly what I was trying to resolve in my mind when you have a seasonal saying one thing, in contradiction to other bullish fundamental data. I wanted to know how you guys would handle this and what your thought process would be.

    It is in alignment with what I was thinking, but being a neophyte at commodity option selling, I am not totally confident that I am thinking soundly. Good stuff, thank you…

    • Michael Gross Says:
      April 30, 2018 at 2:02 pm

      Alex,

      I am glad to hear that. Its been said that trading can sometimes be more art than science. I think this fits firmly into that category.

      Thanks,
      James

  5. good

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