The vast majority of our clients are interested in options and low risk option strategies.
Here is one strategy that is not used often enough, it is called the free trade or the zero risk trade.
For example, let’s assume you want to purchase a soybean call option because you have a bullish outlook for this market. You want to limit your risk in the trade so you elect to buy a 1500 July call option for 40 cents. Now you have a bullish position with risk limited to the 40 cents you paid for the option.
Let’s assume you were correct and soybeans rally to $15.60 and your call is now in the money. You can now sell a 1600 July out of the money call for 40 cents and your account is credited with the 40 cents, offsetting the 40 cents you paid for the long call option you purchased.
From this point on, you have zero risk on your initial investment and still have profit potential up to the 1600 strike price of the out-of-the money call. Your breakeven point is now locked in, as long as soybeans close above the 1500 strike price, you will make money on the trade, with your worst case scenario of losing zero.
Here is another example, this one using put options. Let’s assume you have a bearish outlook for live cattle, thus, you purchase a June 124 put option for $2. Now you have a bearish position with risk limited to the $2 you paid for the option. Let’s now assume you are correct and live cattle trade lower and your put option is now in the money.
You can now sell a 120 put option for the same $2 you paid for the put and your account is credited with the $2.
From this point forward, you have zero risk on your initial investment and still have profit potential to the 120 strike of the out-of-the money put option you sold. Your breakeven point is now locked in, and as long as live cattle close below the 124 strike price, you will make money on the trade, with the worst case scenario of breaking even.
The free trade is a great way to take the emotions out of trading and that can help you stay the course in the trade until your profit objective is met. Free trades can be made as conservative or as risky as you choose.
For example, you can sell options different strikes out of the money, depending upon how much profit and how much risk you are willing to assume, or you can sell multiple options to offset your option purchase.
Corn closed the week $.06 3/4 lower. Last week, private exporters did not report any private sales.
In the weekly export sales report, corn sales shows 7.5 million bushels slated for 2012/13. This is below the 13.1 mb that is needed to stay on pace with the USDA forecasts of 950 mb.
Corn continues its climb post the monthly USDA supply/demand report with gains coming in the front months. I would expect this pattern to continue, with strength in the old crop coming from tighter-than-expected ending stocks and fund short-covering, while weakness will be seen in the new crop contracts as the trade is anticipating an increase in planted acres for 2013.
The market shouldn’t experience any sharp rallies as export demand remains weak overall until spring when weather becomes a major pricing influence.
Strategy and outlook: Producers are now 80 percent of 2012/13 crop and are also 40 percent sold of the 2013/14 crop. The should re-owned 50 percent of the 2012/13 corn crop with July calls.
Soybeans closed the week $.11 3/4 higher from last week. Last week, private exporters announced a sale of 120,000 metric tons of optional origin soybeans to China, 113,000 mt of soybeans to an unknown destination and 510,000 mt of U.S. soybeans to China.
In the weekly export sales report, soybean sales were 35.9 mb. This is above the 6 mb that is needed to stay on pace with the current USDA forecast of 1.345 billion bushels.
The soybean market surged last week with support from the monthly supply/demand report, a bullish COT report and dryness setting into parts of South America.
Weather in Brazil is generally favorable, however weather in Argentina has turned drier than desired and the market is beginning to realize that the crop estimates from Argentina will be the largest of the year. I have heard of reports of soybean harvest in Brazil being smaller than expected.
This should result in the next leg higher in prices.
Strategy and outlook: Producers are 80 percent sold of the 2012/13 production and are 40 percent sold of 2013/14. They should re-own 50 percent of 2012/13 production with July soybean calls if July futures hit $13.75.
Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien. He can be contacted at 605-660-1155.
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