Grain Alert: Consider A Wheat Strangle

Wheat saw weekly export sales of 253 thousand metric tons down 4% from the week prior.  800 thousand or more is needed to be price friendly.  A close look at the export list showed large countries buying small amounts of feed quality wheat at a discount from cash.  Japan 56 thousand, Philippines 52 thousand, and a series of switches and one unknown decrease in import were 400 thousand metric tons.  Even the new crop exports for 2016-17 are only 54 thousand.  Though the U.S. is the number 3 or number 4 port to buy quality milling wheat from and the number 1 port for low quality feed wheat, the ratings may be about ready to change with the new crop here.  The El Nino weather pattern looks to have an early break from dormancy in the western plains.  Dormancy looks to break the last two weeks of March under current weather outlooks.  This sets up one of two things that can happen.  One, sunny warm days and timely rain, setting the U.S. up to become the number 1 port of origin with quality milling wheat for human consumption and a surge in demand.  Or two, freezing temperatures hitting the emerged wheat which would result in burning it. This would set us up for another year as a 3rd or 4th port of origin with low quality wheat for feed usage.  With trend following funds holding a near record short position there is a lot of room for the upside if weather is good.  Trend following funds won’t want to be short if we are moving up on the list of shakers and movers of wheat in the world.  This would make the harvest call options an interesting buy. However traders may also want to utilize put options as protection in case an Alberta Clipper comes down and burns up the wheat.

With these two possibilities in mind I propose the following strangle. Using May options I would propose buying the May 430 put and May 480 call for a purchase price of 10 cents or in cash value $500.00 plus all commissions and fees.

For those interested in grains, Walsh Trading’s Senior Grain analyst Tim Hannagan hosts a free grain webinar each Thursday at 3:00 pm central time. Tim has been ranked the #1 grain analyst in the United States per Reuters and Bloomberg for his most accurate price predictions for soybeans and corn in the years 2011 and 2012. Link for next week’s webinar is below. If you cannot attend live, a recording will be sent to your email upon signup. Or please contact me at any time at slusk@walshtrading.com

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RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING.  THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT.  WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.

 

 

 

 

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