In last Monday’s webinar as well as this weeks, we discussed the idea of selling December Corn straddles with downside breakeven coverage. One example was selling the Dec ’20 Corn 330 straddle (selling both a call and a put to collect premium) and buying the 300 put all as one position. The entry target would be to collect roughly 30 cents on the trade, including buying the $3 put. We wanted to put this strategy in writing for those of you that digest information better from reading it. For this weeks video, click here https://attendee.gotowebinar.com/recording/1724121502160731151
Selling the Dec ’20 Corn 330 straddle for 30 cents on its own would give us a $3.60 upside breakeven ($3.30 plus the 30 cents collected) while the downside breakeven would be $3.00 ($3.30 minus the 30 cents collected).
When we own the $3 put in conjunction with the straddle, it will ensure that the downside breakeven is covered. Therefore, if corn is below $3, the downside breakeven of the straddle will be protected by the $3 put and there is no risk of losing money on the way down (with the exception of the fees to do the transactions). The only risk of losing money on the position would be if the December futures are above $3.60 at option expiration on November 20. If it is, we would be net short Dec ‘20 Corn at $3.60 which we could then a) use as a sale for the current marketing year or b) roll to a future year’s production. For example, if short Dec’20 at $3.60, we will likely have Dec ’21 near $3.90 which could then be rolled to July ’22 at 20-30 cents of carry giving us $4.10-$4.20 July ‘22.
At expiration, the closer to $3.30, the better. On option expiration day, our profit would be the 30 cents we collected minus the difference between $3.30 and the futures price on expiration day.
For example, at $3.17, the gross profit is 30-13, or 17 cents. At 3.46 the profit is 30-16, or 14 cents.
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Partner – AgMarket.Net
Farm Division of John Stewart & Associates
112 S Wool St
Barrington, IL 60010