Soybeans - Bear Spec, Hedge Strategies to Engage Crop Reports

October 12, 2016 4:31AM CDT

Soybeans 60 min

In light of recent lateral, choppy price action that warns that late-Sep/early-Oct's recovery attempt from 9.34 to 9.75 is just a 3-wave and thus corrective affair, we are trailing our short-term risk parameter in Nov beans to 06-Oct's 9.47 low detailed in the hourly chart above.  A failure below 9.47 will expose at least the intermediate-term trend as down and, on the heels of labored 3-wave recovery attempts in Sep and early-Oct, re-expose the major downtrend to new lows below 9.34.

A recovery above last week's 9.75 will mitigate this threat, contribute to a broader base/reversal environment and set the market's sights on 20-Sep's hugely important 9.94 high and our key risk parameter the market needs to break to break the major downtrend from Jun's 11.86 high.  In effect we believe the Nov market has identified 9.47 and 9.94 as the key directional triggers heading forward.

Soybeans Daily

Soybeans 60 min

Basis the soon-to-be-prompt Jan contract these key technical cut points are at 9.53 and 10.00 as detailed in the hourly chart above and daily log scale chart below.  Given the magnitude of this morning's key crop reports, these markets may easily blow through either end and traders are advised to manage their risk around these parameters.

Soybeans Daily

Per the bearish spec and hedge option strategies below, we'd also like to stress the point that the Nov-Jan spread has done nothing but erode since the summer.  IF the report comes out bearish and hits both the Nov and Jan contracts, it is more likely that this spread either stays flat or continues to head south rather than rally.

Daily

BEAR SPEC:  LONG NOV 9.40 / DEC 9.10 PUT DIAGONAL

This strategy involves buying 1-unit of the Nov 9.40 Puts near 9-cents and selling 1-unit of the Dec 9.10 Puts near 7-cents for a net cost of about 2-cents and provides:

  • a current net delta of -0.16
  • gamma ratio of more than 2:1
  • negligible risk if the market rallies sharply
  • profit potential of nearly 30-cents if this morning;s report prompts a sharp resumption of the 4-month downtrend to new lows below 9.34.

As always the greatest threat to long-gamma spreads is theta, or time decay.  If today's report proves to be a total dud and the underlying Nov contract simply languishes laterally, the long Nov put will erode to zero.  With 44 days to expiration however, the remaining short Dec 9.10 put will maintain some premium and can eventually come back to haunt if the entire trade isn't covered once the technical basis for this play has been negated.

Owners of this spread would be advised to cover it if the market doesn't move sharply one way or the other by the end of this week.

Daily

PRODUCER BEAR HEDGE:  DEC 9.70 / 9.50 PUT BACK SPREAD

This strategy is based on the premise that the Jan contract will move away from current 9.65-area prices either by reversing sharply higher and taking out that key 9.99 high from 20-Sep or collapse through 01-Sep's 9.40 low necessitating a hedge to protect producers' inherent long position.  This strategy involves selling 1-unit of the Dec 9.70 Puts around 28-cents and using the proceeds to buy 2-units of the Dec 9.50 Puts around 18-3/4-cents for a net cost of about 9-1/2-cents and provides:

  • current net delta of -0.28
  • fixed and maximum risk of 9-1/2-cens on ANY rally above 9.70
  • maximum risk of 29-1/2-cents if the Jan contract settles at 9.50 at expiration 44 days from now on 25-Nov
  • virtually unlimited, dollar-for-dollar hedge protection below its 9.20 breakeven at expiration.

If this morning's report is a shocker to the bear side this strategy will profit immediately as the red line in the P&L graph below shows.  Please contact your RJO representative for updated bid/offer quotes on these strategies.

Daily


< Back to Articles & Videos

RJO Futures | 222 South Riverside Plaza, Suite 1200 | Chicago, Illinois 60606 | United States
800.441.1616 | 312.373.5478

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.