Trade Idea: A Cheap and Easy Way to Play the Upside in Corn

11/06/2017 2:52 pm EST

Focus: FUTURES

Carley Garner

Senior Strategist and Broker, DeCarley Trading, LLC

We have found a way to play the upside in corn with a low margin, an appealing profit potential and with roughly 20 cents in room for error before any substantial risk kicks in, asserts Carley Garner, senior strategist for DeCarleyTrading.

Corn futures traded on the CBOT (Chicago Board of Trade) division of the CME Group appears to be holding support.  We have our eye on the May futures contract which is hovering in the mid-to-high $3.60 area. Not only have prices recovered from this level in recent months, it is near multi-year lows at a time when the market tends to find a floor going into the spring planting season. 

The lack of volatility in the corn market is shocking.  Even more so, the premium for selling options outright in the corn market offers unattractive risk/reward prospects. 

Yet, long options plays haven’t worked in this market for several months. However, we have found a way to play the upside in corn with a low margin, an appealing profit potential and with roughly 20 cents in room for error before any substantial risk kicks in.

chart

May corn appears to be holding support in the mid-$3.60s.  Thus, we like the idea of going long the May $3.70 call for about 14 cents, then selling the May $4.00 call for about 5.5 cents and the $3.50 put for about 6 cents. The net result should be a debit (cost) of about 3 cents or $150.  If corn is trading between $3.70 and $3.50 at expiration, the risk is a mere $150.  If corn is below $3.50, the risk is theoretically unlimited (it is similar to holding a long futures contract) from $3.50.

If corn is above $3.73 at expiration, the trade starts to pay off.  The maximum profit of 27 cents ($1,350) occurs if corn is above $4.00.

A more aggressive trader might consider going long a March futures contract and then purchasing at at-the-money put as insurance against further declines. Such a trade would enable the trader to hold a long position in corn for nearly four months with risk limited to about $600 before commissions and fees. 

In short, the grain markets have been quiet and are generally being ignored by speculators.  The result could be extraordinary opportunities for those who are creative. If you want to learn more about these types of strategies, you might enjoy my book Higher Probability Commodity Trading.

There is a substantial risk of loss in trading commodity futures, options, ETFs.  Seasonal tendencies are already priced into market values.

Subscribe to e-newsletters by Carley Garner at www.DeCarleyTrading.com.

Related Articles on FUTURES