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As a basis for option selling I only use the outrights. But, as mentioned several times, a suggestion of MRCI is never sufficient to enter a trade.
Meats are an own story. Whereas for many commodities there is a strong relationship between contracts for different months, this relationship is very weak in the meats. Meat contracts for different months almost move like different commodities. Reason is, that it is difficult to store meat for several months, whereas is easy to store gold, grains or coffee. And you never have two contracts related to the same crop, as in the grains or in the softs.
Currently I see the trade suggestions for entering in January and February, in addition open trades suggested earlier. But I also have access to the seasonals for all contracts and many spreads - but without a trade suggestion.
Got a trial to Season Algo. Only Corn available for analysis
From what i can see in the charts, looks like Corn increases in price generally until about March and then it falls into mid June
Prices currently seem to be at multi year lows
They say 70- 80% chance that it will rise within next 3 months
Am i reading this correctly?
Regarding volatility I have not checked
Regarding current trend and weather pattern i have not checked
If these all check out, would we consider a put spread
If yes, then where is the short strike and expiration
Just winging it: Maybe April expiration at 30 delta
If general idea is good, then will research more on volatility, expiration and strike
I do not work with Season Algo, and, thus, cannot comment on your question if you read their information correctly.
According to MRCI data, corn prices will move slightly down in January, up in February, and down in March. It should have moved up in August, October, and December. But moved down in all of these months. It looks like this is not a typical year. In my opinion, it does not make sense to sell options based on seasonals in such years.
There will be the January USDA report on the 12th of the month. This report is well known to produce a significant number of limit moves. To hold short option positions through this report requires deep knowledge of supply and demand, and deep pockets.
There is a lot of corn in the bin. South American crop progresses well, and there is no sign that US farmers will reduce acreage. The only possibility for rising corn prices in the next couple of weeks is weather in South America. In my opinion, prices will grind down slowly for some weeks, if weather in SA does not change significantly.
If you sell the May options, which expire in April, at a Delta of approx. 30 % you sell the 340 strike. This can bring you into the money rather quickly. Have a look at the longterm charts from 2007 onwards, when corn traded at approx. today’s price level. There are several years when prices went downwards for the first months of the year (2007, 2009, 2010, 2015). (In most of the other years after 2007 corn traded in a significantly higher price range.)
Last, but not least: Implied volatility for corn has been rarely lower at this time of the year. And probably will fall further after the report.
There are better trades around. (My current favourite is the LCZ-LCQ spread, which I entered yesterday.)
Just read up that Live cattle usually bottoms in dec and rises through March. For options.. Christmas would have been a good time to sell put spread.. not sure if i am too late..
regarding your spread: Long Dec, Short August i will look at my other book and get back with my analysis.....but wondering why a spread so far out?
ad 1) I entered a long LCM position in December, and added LCM 126 calls later. The futures might go up a little bit further, but in my opinion it is too late to enter short puts. I think about a short call in the LCG or LCJ after a turnaround.
ad 2) Because it works. The trade was successful in 14 of the past 15 years without any significant drawdown. This year I like it especially, as the spread moved down to its lowest values. It has never been below 1 (current value) since 2002. (I did not check older charts.)
Just found a publication on corn prices in 2016 by U of IL:
"(U of IL’s Dr. Schnitkey on harvest corn prices) History suggests a wide range of possible
prices, with a significant chance of the harvest price being below $3.00. Some farmers may
be considering lowering coverage levels on crop insurance in order to lower premium costs.
This may not be prudent as history suggests there still is a large risk of low prices."
Since 4th of January (date of your question) the RB contract moved down more than 10 cents (1 cent equals $ 420 for the outright future). In spite of MRCI suggesting a 100 % win rate. I assume that your stop loss would have been hit.
Many of the 100 % win rates work out at the end, but show drawdowns for some years that are not acceptable.
In the case of RB it might work out, but it is hard to find an entry point.
Especially cannot/should not put stops on spreads.. might take quite a lot of heat agree not worth blindly following MRCI
With this Chinese rout, all energies are in the toilet.. but RB might recover more easily than CL which has such a glut.
On the other hand, when there is blood on the streets and vol is high, good to sell small qty of put spreads and adjust as needed.. of course tough to catch the falling knife to predict the turn. prob best to wait for a signal say on daily to be safe. and with seasonals.. energy prob recover only by late Feb/March
Thanks for your update on Corn. Read some more.. looks like we have more ways to fall with South America weather not showing much issues yet
There is a glut in RB, too. Have a look at yesterdays EIA report. The reason why i think there is a chance that RB prices move up is that cheap gasoline prices will motivate drivers to consume more of it. Additionally, the warm winter in the US makes this easier.
I just entered another seasonal trade, suggested by MRCI for the 19th of January: RBH - CLH (they suggest the July contract, but I prefer the March because of better fills). But be careful - this spread can move strongly.
