Navigating a Threatening Bottom in Corn; Hedge & Spec Option Strategies

September 8, 2016 3:40AM CDT

While the market has yet to recover above our short-term risk parameter defined by 23-Aug's 3.35 nondescript low, it's failure to sustain late-Aug's losses below most of the month's prior 3.22-to-3.29-range support-turned-resistance cannot be ignored as an early indication that the bear has run out of steam and may now be vulnerable to at least an interim corrective recovery of some significance.   In the analysis below we'll provide mounting evidence of technical factors typical of base/reversal-threat environments that could be major in scope.

Corn 60 min

Corn Daily

Only a glance at the daily log scale chart above is needed to see the sharp slowdown in the RATE of descent over the past two months versus Jun's sharper decline.  This slower downside pace has created the POTENTIAL for a bullish divergence in WEEKLY momentum shown in the weekly log active-continuation chart below.  A recovery above 19-Aug's 3.44 corrective high and key risk parameter is needed to CONFIRM this momentum divergence to the point of non-bearish action like short-covers and cautious bullish punts.

The weekly log scale active-continuation chart below also shows historically bearish levels of market sentiment indicated by both the Bullish Consensus (marketvane.net) and our proprietary RJO Bullish Sentiment Index.  COMBINED with a bullish divergence in mo above 3.45, we believe the technical conditions would be ripe for a correction or reversal higher that could surprise by its scope.  And Mon's Crop Production Report may be just the catalyst for such a surprise.

Corn Weekly

Finally, we've been referring to the 2008-09 and 1998-2002 base/reversal processes as prospective templates to help navigate the END of the secular bear market in corn from Aug'12's 8.49 all-time high.  In the monthly log scale chart below is intriguing to note that late-Aug's resumed bear only took out Oct'14's 3.18 low by three lousy cents, the exact amount Sep'09's decline broke Dec'08's 3.05 low in the establishment of a base and reversal that ushered in a 3-year, 181% bull market.  We are NOT forecasting such a reversal here.  Indeed, the bottoming PROCESS in that previous example spanned NINE MONTHS before the bull really took control.  But we ARE saying that if this market cannot sustain recent losses below 3.45, traders should prepare for at least a corrective rebound of indeterminable size that could surprise in length and opportunity because market sentiment is so overwhelmingly bearish.  A quick return to the upper recesses of the past couple years' 3.15 - 4.40-range would not be out of the question.

These issues considered, all traders are advised to pare still-advised bearish exposure to more conservative levels as we believe the risk/reward merits of a more aggressive bearish policy "down here" and under these technical conditions have eroded.  Furthermore, all remaining bearish exposure is urged to be covered on a recovery above 3.45 ahead of a correction or reversal higher that could surprise in length and time.  Below we discuss a cautious but favorable risk/reward bullish spec strategy and also a bull hedge strategy for end-users.  Producers would be advised to pare or neutralize bear hedge strategies on a recovery above 3.45.

Corn Monthly

BULL HEDGE:  SHORT NOV 3.30 - 3.10 PUT SPREAD / LONG NOV 3.45 CALL COMBO

End-users needing to protect against a surprise rebound from historically low levels are advised to consider this bull hedge strategy that consists of selling the Nov 3.30 - 3.10 put spread for about 4-3/4-cents and buying the Nov 3.45 calls around 7-cents for a net cost of 1-1/4-cents,  This strategy provides:

  • a current net delta of +0.61
  • fixed risk/cost of just 1/1-4-cents if the underlying Dec contract settles anywhere between 3.30 and 3.45 at expiration of the Nov options 43 days from now on 10/21
  • maximum risk/cost of 21-1/4-cents on any decline below 3.10 at expiration
  • unlimited, dollar-for-dollar upside hedge protection above 3.46-1/4 at expiration on 10/21

This strategy will also cover 30-Sep's key Grain Stocks Report as well as 12-Oct's Crop Production Report.

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BULL SPEC:  OCT 3.45 / NOV 3.75 CALL DIAGONAL

For speculators who wish to prudently but safely make a bullish bet ahead of Mon's key report and also get a good night's sleep Sunday, we recommend buying the Oct 3.45 / Nov 3.75 Call Diagonal Spread.  This long-gamma trade involves buying 1-unit of the Oct 3.45 Calls around 2-3/4-cents and selling 1-unit of the Nov 3.75 Calls around 1-3/4-cents for a net cost of a penny.  This strategy provides:

  • a current net delta of +0.20
  • gamma ratio of 3:1
  • negligible risk if the bear resumes its collapse after Mon's report
  • profit potential of 29-cents on a correction/reversal above 3.75

As always with long-gamma trades, theta, or time decay is its enemy.  But with well more than a week to expiration after Mon's crop report for the market to show its directional hand, traders will have ample time to discern lateral, non-movement needed to threaten this trade and cover it for a small loss by mid-to-late next week.  Please contact your RJO representative for updated bid/offer quotes on these strategies.

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This material has been prepared by a sales or trading employee or agent of RJO Futures and is, or is in the nature of, a solicitation. This material is not a research report prepared by RJO Futures Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.