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Future Options - Corn & Wheat

Updated: May 6, 2021

Raising prices of the agriculture commodities seems reasonable as governments around the world are stacking reserves due to Covid-19 pandemic. However this may not be the only cause for the BO of these commodities from a multi year downtrend.

Shown Hackett (Hackett Financial Advisors) suggests that an extreme weather events together with La Nina, could cause a major drought and floods in different parts of the world, that could cause a serious production shortfalls for the supply side.

So, we can trade that idea using ETF products like these two:

However, I prefer to use the more liquid Futures options.

When trading Futures although we usually have better margin requirements, we have other things we need to consider.

First, the future can gap to a limit threshold, and not trade for several days, which will be dangerous as we cant take stops when we want to. Also, we saw during the market crash last year that even the most liquid markets like the Oil Futures can break suddenly and trade at a negative price for a while.

By using options we can eliminate both risks, and risk only the premium that we payed for the options.

Another thing to consider is the Futures term structure. Usually it trades in a Contango, which means the the longer futures have higher prices. That means that even if the price goes up you can still lose money on the longer term futures. However, today we have a Backwardation term structure (longer futures trade a lower prices).

That gives us the opportunity to buy Calls on long-term futures, with a smaller cost relative to the current price.

Let's look at the Corn & Wheat futures:

You can see that the Corn Dec future is trading at 459 and that the Mar future is trading at 532. This is a big difference. So given my bullish view of the possibility for higher prices if the weather will not be in favor of the agricultures, I can buy C500 on the Dec Corn future for about 30. This means that my BE point will be at 530 in Dec.

As for the Wheat futures, the backwardation is more moderate, so I can buy C650 to Dec at 64, which is a BE point of 714 (when the Mar future is trading at 680).

So, given the trade frame that the Corn & Wheat prices are heading to a new bullish cycle, I can risk only about 6K on corn options and control the right to buy futures that are equal to 100K exposure, and another 6K on wheat options to have the right to buy futures that are equal to 65K exposure (the futures are in cents and with 5000 multiplier).

While I'm not a commodity trader, I believe that there is a good R:R in that strategy.

Apr 26th update:

Following the Mar31 USDA report that showed U.S farmers are planning to plant less corn and soybeans than expected, the market started its journey north.

3R and momentum:

Exit plan:

Take profit from 6 c500 when the Dec future is at the 600 level and let the C600 run...

May 6th update:

I change my mind, and decided to sell the C600 and not the C500 because I can still see the market going up but maybe not so strong. Banked 1R profit and took out my risk and let it run...

Moving on to Coffee:


The following trade frame is an example for educational purpose only.

We are not an investment advisory services, nor are we registered investment advisors or broker-dealers and do not purport to tell or suggest which securities customers should buy or sell for themselves. Customers should always check with their licensed financial advisor and their tax advisor to determine the suitability of any investment.

It should not be assumed that the methods, techniques, or indicators presented in this example will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. We, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

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