Buying Corn Put Options to Profit from a Fall in Corn Prices

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FUTURES/OPTIONS ; Livestock Prices Fall; Corn and Wheat Gain

By The Associated Press

    March 15, 1984

Livestock and meat futures prices mostly fell yesterday on the Chicago Mercantile Exchange, but a Agriculture Department report released after the close was viewed as bullish for prices.

Cattle prices fell for the third consecutive session because analysts were revising their expectations for the cattle-on-feed report from the Agriculture Department, said Chuck Levitt, an analyst in Chicago with Shearson/American Express Inc.

The analysts’ revisions mainly allowed for a greater increase in the number of cattle put on feed lots – a negative factor for prices, Mr. Levitt noted.

98% of Level a Year Ago

Instead, the report indicated that the number of cattle on feed lots in the seven major beef producing states on March 1 was about 98 percent of the level of a year earlier. With no substantial increase in cattle, prices likely could turn back up, Mr. Levitt said.

But Robert Saathoff, vice president for commodity research in New York with Prudential-Bache Securities Inc., noted that the increase in the number of cattle placed on feed lots during February was the third monthly rise, and he said he expected the price of cattle for delivery in June to come under pressure.

Meanwhile, hogs and pork bellies mostly fell as some traders were said to be cashing in recent profits. Trading in hogs and pork bellies was moderate to light, following the trend in the beef market, Mr. Levitt said.

”The market was marking time to see what kind of competition beef had to offer in the months ahead,” he said.

Corn and wheat futures prices rose, and soybeans were mixed on the Chicago Board of Trade. The advances were led by contracts for delivery before the next harvest, and traders said buying in those contracts reflected suggestions that export sales will remain strong.

Prices were supported by the weakness of the dollar against foreign currencies, which added to expectations of strong exports.

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This Easy Corn Trade Could Return 38% By Harvest Season

C rop growing seasons are dictated by the weather. Farmers generally plant in the spring and harvest in the fall. Some countries in the Southern Hemisphere do the opposite because of their weather, but farmers — and traders — know in advance when crops should be planted and harvested.

This pattern has an impact on prices and results in a cycle that can be seen in the price of corn and other grains.

The chart below shows the seasonal pattern for corn. Traders in the futures markets use charts like this to understand the normal direction of the trend. Corn usually starts the year by moving higher. There are some smaller up and down moves, but the price generally peaks in August and then falls into November.

Corn is planted mostly in May and June. Harvest can begin in September and is completed by November. This explains the November bottom in prices seen in the chart. That is the time when all of the crop will be out of the field. There will be no additions to supply for months, and prices should move up as supply decreases.

An August peak is shown in the price chart despite the fact that prices drop more than 60% of the time in July. The peak indicates that up moves are fairly large and often driven by panicked reactions to weather reports.

During the summer, grain markets can be driven by news. For example, a hailstorm in the Midwest could destroy thousands of acres of corn and push prices up. Often the damage will turn out be isolated to a small area, and prices resume their downtrend.

This year, farmers planted more than 97 million acres of corn, slightly more than last year. The U.S. Department of Agriculture also expects farmers to enjoy better yields than last year. USDA estimates are for yields of about 156 bushels of corn per acre planted, compared with about 123 bushels per acre realized last year.

With a big harvest expected this year, there is every reason to expect to see corn follow the seasonal pattern and decline in price into the fall. The USDA expects the price of corn to fall to $4.40 to $5.20 per bushel. Currently, futures on corn are trading at about $5.35 a bushel.

Until recently, futures markets were the only way an investor could benefit from a decline in corn. There are now ETFs that allow investors to trade grains just like they would trade stocks , and options are available on many of them. Put options on corn ETF Teucrium Corn ( CORN )offer a way to profit from the expected price decline.

Put options give the buyer the right but not the obligation to sell 100 shares of a stock or ETF at a predefined price before a predefined date. If prices fall, buyers of puts profit. A put option on CORN expiring in November with an exercise price of $40 is trading at about $3. This put option could deliver a large gain if CORN falls.

The daily chart shows that CORN may have completed a small double-top pattern and is starting to move down. Prices moved higher in May as wet weather delayed planting and traders took positions to benefit from problems that could develop if that weather continued. The weather changed, and planting is back on schedule.

The from the pattern shows that CORN could fall to $35.46. At that price, the $40 put option would be worth at least $4.54.

The price target from the pattern shows that CORN could fall to $35.46. At that price, the $40 put option would be worth at least $4.54.

Risks to Consider: Corn prices may move up and down with weather reports through the summer but should be lower by November. Puts allow traders to benefit from that seasonal trade with risk limited to the amount they pay for the option .

Action to Take –>

— Buy CORN Nov 40 puts at $3.25 or less.

— Set stop-loss at $2.

— Set price target at $4.50 for a potential 38% gain in five months.

This article was originally published at ProfitableTrading.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2020 StreetAuthority, LLC. All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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