24 June 2019 MONDAY TRADE COMMENTARY

Greetings:

The breakouts in Crude Oil and Gold last week were brutal for my positions.  Hard to predict an act of war and the bandwagon effect that followed.  About half of the analysts I’ve read are bullish from here on Gold and the other half calling it ‘overdone’ and saying prices will fall back down to $1350 / ounce soon.  For me to say what either crude or gold might do this week would only remind me of last week and how unpredictable things can be.  I think I won’t be alone in this uncertain setting and I want to see what follows this week.

 

DECEMBER 2019 CORN CHART:

The news on Corn still bullish in spite of the fact that prices have dropped basis the DEC19 contract, from a peak of 473 down to 455 by Friday.  Stories abound about how yield and acres should be reduced over the next two to three months in the USDA reports.

The plant rate last week was 92% versus 100% last year and that implies a 7.42 million acre reduction.  Some of the ag news site suggest that acreage loss could be as high a 9 or 10 million acres due to the prevent-plant options.  Using the JUNE WASDE report, a loss of 7.4 mm acres would leave ending stocks at 985 million bushels and a stock-to-use ratio of 6.9 %.  Last year’s yield on the corn crop was 176.4 bush/acre on planted acres of 89.1 mm acres. Keep in mind the latest WASDE in JUN19 the planted acres was still at the 89.8 mm acres, a higher number than last year’s 89.1.   In the same WASDE the yield was dropped from 176.4 down to 166 already, and if yield drag is worse, we could see very low stocks/usage — as low or even lower than the highlighted green area in the chart below around 2009 to 2013.  These numbers build a strong case that DEC19 prices have not seen the top high price yet this year.  I don’t know when the time to sell CALLs will be, but it isn’t now.

The China/USA trade/tariff talks are like a story that has no ending in sight.  With a possible slow down in global economy, there are high stakes for all involved here and this supports the idea that any resolution could be a while in the making – as both sides continue posturing.

At the time of this writing, Crude Oil seems just one more missile fired -away from going up another $3 to $5 a barrel.  I would like to see things settle down a bit, but I am hoping to sell more Crude and Gold options when the markets find their new shape – and I hope that is soon.. and that the strikes I find will be very FAR OTM indeed.

There is a strategy call the back/ratio spread where one’s buys a CALL and sells multiple higher strikes.  Also sometimes called a ratio spread.  I will be exploring this strategy for the Corn market this week.  With the back/ratio, a trader can make a very nice return when prices go UP, but do not exceed the higher strike.  This is a difficult strategy to properly place, so if I do find something, I will explain this in much greater detail.  This is not real, just a hypothetical example: One could BUY a 550 strike CALL and sell two or more 650 CALLs with a net CREDIT.   If prices go UP, the lower CALL profits more than the higher strike loses.  If prices should go DOWN, one get to keep the CREDIT on the spread.  My hope is that the JULY WASDE will show a greatly reduced yield and drive prices up, then if the figures look realistic, the very high strikes for corn would be pricey enough to sell into the harvest months ahead starting in SEP.

Whatever happens, it will be an interesting week.  I would really be interested more strangles on Crude and more PUTs on Gold, so I’ll be shopping those this week.   Also I’ll be watching crop progress on soybeans, still weeks of planting left for beans yet.

To state the obvious here: The kind of news that could pop Crude Oil UP again is just not predictable.  The news cycle is still fresh and details on what happened are sketchy at least.  Still, short of a war (which, as we found, was not out-of-the-question) the strikes higher than 90 could have some merit if the premiums get high enough.

Have a great week. -Don

 

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