Greetings: Nice to get back to a full trading week after the short week last week with light trading, which is typical during market holiday weeks.
Lots to discuss today: The non-farm payroll reports last week(for the USA) were not as poor as expected so prospect for a July FED rate cut have somewhat diminished (probably delayed for a while.) There was an indirect threat from China that they might not purchase any USA agricultural product until “all tariffs are lifted.” Another development is increased tensions between Europe and the USA – a trade dispute (tariffs) could heighten soon.
Crude: Though draw downs of crude stocks supported crude last week, it seems there could be some chance now the bullish string for crude oil may be coming to an end. This in spite of an OPEC announcement to extend all productions cut through March of 2020. The will likely mean a more stable trading range for a while and this bodes well for selling more short strangles on crude. I want to see some proof of this theory with crude prices this week before jumping in – and that might not take long at all. USA oil production has exceeded 12 million barrels per day (bpd) for 20 weeks in a row. This, even with the Baker Hughes US oil rig count ending last week at 788, is a count about the same level as the first two months of 2018. Exports out of the USA are healthy, between 3.0 and 3.77 mm barrels per week. Exports from USA to China have declined a bit due to trade tensions, still USA overall exports remain healthy. I only have short DEC19 Crude short 90C and short 40P at this time. I will shop more this week when I see some indication of price stability that could result in range trading for a while into the end of this year and maybe beyond. There is, on any day, always the chance some more mid-East dispute can disrupt this, but that threat is always there.
Gold: This precious metal has had a nice run, as the chart below indicates. The latest COT (Commitments of Traders) report has a net commercial long position holding of an estimated 325,000 contracts. Those contract have been added since October 2018 when that net long position was near zero. Historically, the COT long commercials are very high (top of historical range.) That fact – coupled with the news of unexpected import tariffs (up to 12.5%) on Gold in India (the world’s largest gold consumer), will likely signal an end to the gold price run up. December 2019 gold futures have traded this weekend to $1401, -19.70 dollars/ounce. I am short only a DEC19 PUT option, strike 1150/ounce. I sold it for a small amount: 0.50 ($50) and it last traded at 0.20, so I will try to close this trade out as soon as I can. With my outlook for gold prices possibly looking to move down, I will close this 1150 P, and shop to sell CALLS this week, and then shop to form short strangles by selling PUTS.
Corn: Last week I mentioned an analyst was advising selling a 390 Put option on Corn- and said I wasn’t convinced on how that might work. This week, my tune has
changed. A lot has been happening in Corn: In June the Crop Progress reports from USDA, reported very slow planting progress. This was as the corn fields had wide-spread, historical flooding. The flooding got worse, and planting even slower, which ran up prices again between June 11 and June 17th from $4.30 to $4.73, see the chart below DEC19 Corn. Then two weeks later when everyone expected USDA reports to lower acres again, the USDA that had already lowered the planted acreage prospect by 3 million acres, did an about face on June 28th, and actually showed an increase. Since that report was not a report on physical plantings but “intended acres”, it seems farmers that were unsure – probably reported “intended”. Corn closed limit down ( the maximum allowed down in one trading day) — about -30 cents. This caused wicked volatility. The latest development is that the market has digested this report, discounted the increased acreage and now, again, expects a cut of planted acres soon. It was decided by USDA to do a special additional survey and to include that result into the August 2019 WASDE. This may get confusing so let me point out the NEXT WASDE report is this week, it will be the JULY 11th report (Thursday this week -Noon Eastern time) and the special survey won’t be included until the AUGUST report.
Let try and bottom line this for you: Corn is showing definite bullish action right now, and both the planted acres and the yield per acres, already lowered to 166 bushel/acre (compared with about 171 last old crop/last year). This means that the average “to farm” price projected by USDA may move up from $3.80 to as high as 450 to 550, depending on planted acres and yield. In normal seasons (this is clearly a “counter season” price pattern) I would be selling Corn CALLs already. Let me be clear here: If the Crop Progress and the WASDE give out totally unexpected numbers, we could have a repeat of the fast bearish action. For this reason, it can be very risky to sell PUTS based on the explanations above. I am considering selling PUTs now, with the setup I described above. If you have any questions, email me and I will clarify in a post here on the newsletter website (so everyone can read this discussion.). I never use anyone’s name in my columns, so your privacy is assured. I will seriously be shopping to sell Corn DEC19 PUTS this week, all while following the news closely.
There are a couple of ways to make a PUT-selling play: First the very far OTM PUTS, less risky than closer to the money but profit could amount slowly due to the long time frame of DEC19 PUTS that expire around 11/25/2019. Another choice might be to sell a SEP19 PUT, expiration only 47 days out near the end of August, a much shorter term play. For example: The SEP19 $4.00 PUTS while 40 cents OTM are sitll selling for 4 go 5 cents each; they closed Friday at 4.875 cents (($243.75 each).
It would not be a ‘time farming’ ploy but the very brave might sell that PUT and then buy a $4.50 CALL for a net cost of about $600 each. Short a PUT and LONG a CALL is similar to what can be called a ‘synthetic’ LONG contract. Technically, the strikes would be near the same to produce what is called a ‘synthetic long’ (contract). Since, in a bullish market, the CALLS appreciate faster per move than the PUTS lose money, they can work better than a regular long contract while using less margin money. This is an advanced strategy, not generally recommend for inexperienced traders. The best-case scenario would be to make a good short term profit, and get out. Worst-case: The market tanks big time and at least you collect premium on the short CALL to somewhat offset losses.
Probably the smarter play is to sell far OTM PUTS now, and then when corn goes higher (hopefully), you close the PUTS for profit, and THEN (if the time is right) sell some CALLs very far OTM.
Since the primary purpose my newsletter to to help readers study strategies, I am including these thoughts, so you have some practice with various option strategies, though technically – that sell the PUT and buy the CALL is NOT a time-farming trade at all. I’ve traded ag options for almost 30 years, and I never get tired of all the combinations and variation that can be considered. Usually, I must say simple is always better – a good adage to remember.
The farmers and traders are at this point almost astounded as to why the USDA didn’t lower the projected yield but actually raised it by adding 4 million planted acres at a time when it seems nobody can believe that anything near that reported 91.8 million acres has been/ or will be planted. I’ve never seen this happen before. I don’t think anyone has. Remember, if you follow Corn to see the Ag TV video program (free), it is posted about 6:30 AM Eastern time on weekdays. Good commentary there sometimes. here’s the link:
And that’s how it goes this week. Since we have a full trading week, I expect to be issuing either more comments and/or trades this week. Good trading to all- Lot’s to think about this week. — Don
WASDE July 11, 2019 at 12 Noon Eastern Time
The commentary and examples are for teaching purposes only and are not intended to be a trading or trade advisory service. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein on the web site and/or newsletter, are committed at your own risk, financial or otherwise. Trading with leverage could lead to greater loss than your initial deposit. Trade at your own risk. Investors and traders are responsible for their own investment/trading decisions including entries, exits, position, sizing and use of stops or lack thereof. This is not a trade advisory service and is for educational purposes only. The content on the pages here is believed to be reliable - but we cannot guarantee it.