Short-term weather concerns in South America, along with continued strong exports, helped spark a fifty-cent rally in soybeans this week. Traders can use this recent rally as a selling opportunity following the January 12th USDA crop report.

Despite some dryness in northeast Brazil during the first half of January helping to support the market, the weather concern seems to have offered excuses for traders to short cover and buy into the market. However, the window to hurt the crop down in Brazil and Argentina is shrinking, as harvest begins in earnest in February.  

Weather in South America was optimal, but January is when key yields are made. The major growing areas of Mato Grasso and southern Brazil continue to see enough moisture with temperatures topping at or near ninety degrees. Soybean basis levels are weaker across the United States, as farmers potentially look to sell on this rally.

Both index and trend following funds will use any January rally to sell and take profits into February as they clean out their books before designating their largest investment of the year during U.S. planting season in the spring. Any rally in March Soybeans should be used as a selling opportunity following Monday’s USDA report.

The Trade

  • Buy the March Soybean 980 put, while selling the March Soybean 9.00 put for a purchase price for eight cents, or in cash value $400.00.
  • The risk on the trade is the price paid for the put spread plus all commissions and fees.
  • The maximum collection on this trade is $4,000.00, if both strikes finished in the money at option expiration in late February. 

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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.