Lowell Enlow was a contractor for NASA and operated several insurance agencies in Florida. Nick Morr...
2 Ways To Trade Corn with Options
07/17/2012 8:00 am EST
The CME group corn contract represents 5,000 bushels—that’s enough to fill a boxcar—with a present cash value at $7.50 a bushel, or $37,500. Prices for the distressed crop in the ground, which were at a $5 base in mid-June, have jumped 50% in just a few short weeks.
The option volatility has also increased as the uncertain weather market sorts itself out. New crop options for December have fattened up, with the key growing season and pollination time crucial to determine yield. Lack of moisture now is particularly damaging to the crop and the previously projected record harvest that has now been downgraded.
Rain makes grain, pure and simple. Chicago—home of the world-renowned futures exchange—and much of the Midwest has seen little rain for the last month, with drought conditions pushing futures prices skyward, unlike the crop. Daily price action has been extremely volatile, with large dollar trading ranges for those gutsy enough to trade the fast-moving contracts themselves.
Using long options gives staying power to ride the extreme swings and hold on for the larger overall true trend. The risk is completely limited for the option purchasers who may sleep better at night if they hear the sound of thunder above.
Because the premiums have inflated, an option spread strategy could be a better value than the expensive outright calls or puts. The spread can profit from a modest move in the desired direction instead of the home run often needed for the low-probability, inexpensive, deep out-of-the-money options often bought by novices.
Corn Long Option Pricing
Because the standardized contract is 5,000 bushels and is quoted in cents per bushel, each penny represents $50. Some December options quotes as of the close of the week ending July 13 are below. The December Futures closed at $7.40, with a $7.50 call at 57.5 cents, worth $2,875 ($50 x 57.5).
Bull Example: The $8.00/$9.00 call spread for 21.75 cents, or $1,087.50, expiring November 23 (more than four months) could be a bullish play.
Bear Example: The $7.00/$6.00 put spread, for 30 cents, or $1,500, expiring November 23 (more than four months) could be a bearish play.
Futures options provide the direct play on what is shaping up to be one of the biggest stories of the summer. Versatile option strategies can be utilized for any market conditions—bullish, bearish, or neutral. It is time to grow your profit potential with commodity options.
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