Two weeks ago I sold a 425 put that expires July 26th in corn. Since then as we know the price has dropped to that level. So Friday I may be put a Sept corn future at 425. I also sold a 465 call that expires Aug 23rd. I have collected enough premium that as long as corn stays above 417 I make a profit. If I get put a futures contract I will likely roll down my call a bit to collect more premium. Trying to learn more on how weather impacts the price, it has been moving around a lot this summer. I assume corm moves a lot during the summer months?
You bet corn moves around from the weather in the Summer Grant.
I guess just tuning into the forecast and comments here is helpful but what has impressed me the most with your trading is that you are selling options from the get go.
So many traders get caught up wanting to buy options because they fear the risk of having futures and especially way out of the money options because they are cheap.
Most of the best options traders in the futures markets of physical products at least SELL options.
An analogy to me is like going to a casino. We know that you can go there and hit a jackpot by being lucky and go home with more money than you came in with(I guess there are card games where skill comes into play but have never been to a casino) but the games are rigged so that the casino always makes money in the long run based on the odds.
When you play options in the futures markets, the game is rigged for the sellers. A smart trader can assess the risks, odds, values and relationships of options trades to improve their chances of having winning trades. Not potential homeruns with minimal risk and tiny chances that rarely pan out but small profits that almost always pan out over and over and add up over time.
With back up plans to reduce or limit losses for those outlier moves that pay off handsomely for those that are long options.
The only time I consistently make money is when I sell. I have two IRAs, one traditional and one ROTH. In my traditional all I do is sell at the money puts in stock I don't mind owning. I look for higher volatility so the premium is high. Now I have 100s of shares of stock I own which I have a significant reduced my cost basis in and getting dividends. The futures thing is new to me so I am testing what I have learned. That's why I chose to sell the put in Corn. If corn closes above 425 Friday I will exit my position for a small profit.
OK, that makes sense for you to have a good understanding of options already from selling them with your stocks.
The only time I ever traded options was in 1994 after 2 coffee freezes in Brazil in June and the price had quadrupled to well over $2 and the volatility was off the charts, I sold a couple of $3 calls.
I actually did that trade on a suggestion from somebody at Freese Notis Weather, Craig Solberg. I subscribed to a service of his back then to get a "2nd opinion" on my weather trading thoughts.
Sharp guy. Here he is today:
(Always wanted to do a "hold my beer" tweet) 2019..."Corn is way behind schedule in maturing" 1993..."Hold my beer..."
Well done!
Now get long. Daily low acheived
The most successful equities trader I ever knew wrote puts on stocks he was bullish on. His worst case scenario was getting assigned stocks at a discount that he would have bought anyway.
Well, I will be put a futures contract at 425. I rolled down my short call to collect more premium. My break even point is now 411.
Well, my position is not looking great right now. Thinking of rolling down my call a little more to get some more premium. Corn is now well below my break even point. I still feel good about my trade. Corn MOVES!
I'm surprised that corn has dropped this far, even with ultra bearish weather but it reminds me of some things that one should always remember in July for corn/beans.
If the crops are not being subjected to very adverse weather, corn and beans almost always go lower in July into early August. Even slight adversity can see us drop if the market is at lofty levels from trading extreme adversity.
Every day that passes, is one day closer to the crop being made, which means taking out some growing risk premium.
July is by far the weakest month seasonally for corn and beans.
Also, the market participants come in every day in July and decide if the weather forecast changes just made the crop bigger or smaller...........then they trade that. There is not a number for how much bigger or smaller that corresponds to a new, adusted fair value price, just "is the crop getting bigger or smaller"
If it's getting bigger based on added rains, the sellers get more aggressive and can really pile on, while the speculative buyers are not interested in putting on a position when the crop is getting bigger and vice versa.
Risk premium in the price may come out at an average of let's say 1c/day over a couple of months with good weather. But it comes out with in massive surges with a mob mentality where everybody has the same idea at the same time.......then, let's up or even recovers after being overdone............then another surge or more.
And hot/dry weather forecasts will result in added risk premium.
However, the later in the season we are, the less risk premium can be in the price because its closer and closer to being made and less and less vulnerable to being hurt.
Extreme weather in june, for instance has almost unlimited potential to push prices MUCH higher because you can still KILL much of the corn crop with weather.
By the end of July, even the most extreme hot/dry for the rest of the growing season is only going to take off X number of bushels from production.
The one exception would be an extraordinary event, like an early September, 1 in 50 year freeze this year(like 1974) or if we had 10 inches of rain across several keys states(like 1993).
Both corn and beans violated some key support levels today and that no doubt, added to the technical selling from those that trade chart patterns and trends.
Craig Solberg