Agricultural

Bull & Bear Corn Hedge Strategies to Engage Crop Reports

Posted 01/10/2018 1:37PM CTRJO Market Insights

corn_mar18_60min_chart

As the market has yet to minimally recoup even our short-term risk parameter at 3.55, it remains premature to suggest a base/reversal condition is at hand. This said however and with a huge crop report tomorrow, it wouldn’t take much to go from a 6-month downtrend to a reversal that could be major in scope. In effect then, a cautious bearish policy and exposure remain OK with a recovery above 3.55 sufficient for shorter-term traders to move to the sidelines.

Commensurately larger-degree strength above 04-Dec’s 3.61 larger-degree corrective high remains required to confirm a bullish divergence in momentum that would then likely identify 18-Dec’s 3.46 low as the end of a major 5-wave Elliott sequence down from 11-Jul’s 4.26 high and resumption of a base/reversal environment that we still believe will be major in scope.
corn_mar18_daily_chart

From that very long-term perspective we continue to believe that:

  • the bullish divergence in weekly momentum on an active-continuation chart basis below
  • the market’s gross inability to sustain levels in the lower-quarter (i.e. <3.46) of the 3-year lateral range
  • the likelihood that the market is at or near the end of a 5-wave Elliott sequence from Jul’s 4.26 high amidst
  • historically bearish levels in our RJO Bullish Sentiment Index

maintains the odds of a major, multi-year base/reversal process and that a bearish policy “down here” is a very slippery slope. Indeed and in general, we believe these conditions warrant a bias to the BULL SIDE. But as the “trend is our friend,” proof of at least short-term strength above 3.55 and preferably larger-degree strength above 3.61 is required before more blatant bullish decisions can be considered a more objective and disciplined act.

In sum, a cautious bearish policy and exposure remain OK with a recovery above 3.55 required for short-term traders to move to the sidelines and subsequent strength above 3.61 for long-term players to take similar defensive action AND move to a new bullish policy. In lieu of such strength, further lateral-to-lower prices should not surprise.

corn_weekly_chart

PRODUCER BEAR-HEDGE: SHORT FEB 3.50 – 3.60 CALL SPREAD / LONG FEB 3.45 PUT COMBO

This bear-hedge strategy involves selling the Feb 3.50 – 3.60 Call Spread for around 2-1/2-cents and buying the Feb 3.45 Puts around 2-1/4-cents for a net cost of around “even”. This strategy provides:

  • a current net delta of -0.65
  • favorable margins
  • zero risk if the Mar contract expires between 3.45 and 3.50 16 days from now at expiration on 26-Jan
  • fixed and maximum risk/cost of 0.10-cents on ANY rally above 3.60, allowing one’s cash position to profit unabated thereafter
  • virtually unlimited, dollar-for-dollar downside hedge protection below its 3.45 breakeven at expiration on 26-Jan.

corn_bear_hedge

END-USER BULL-HEDGE: SHORT FEB 3.50 – 3.40 PUT SPREAD / LONG FEB 3.50 CALL COMBO

This strategy is basically the inverse of the bear-hedge strategy above that involves selling the Feb 3.50 – 3.40 Put Spread for about 3-1/2-cents and buying the Feb 3.50 Calls for about 3-1/2-cents for a net cost around “even”. This strategy provides:

  • a current net delta of +0.84
  • favorable margins
  • fixed, maximum risk of 0.10-cents on ANY decline below 3.40
  • unlimited, dollar-for-dollar upside hedge protection above its 3.50 breakeven at expiration 16 days from now on 26-Jan.

Technically, as we’ve detailed above, we believe this market to be at a particularly acute flexion point with the 3.55 and especially 3.61 levels being the smaller-degree and larger-degree gateways to what could be a surprisingly bullish outcome. We expect the risk/reward merits of an eventual bullish policy and exposure to be outstanding. Likewise, further lateral-to-lower price action should not surprise until and unless the market can recoup these specific bear risk parameters.

Fundamentally, our own Randy Mittelstaedt confirms that tomorrow’s crop reports may easily be some of the biggest, most impactful reports of the year, easily capable of prompting a move more deeply into the lower-quarter of the 3-year range OR above those pivotal bear risk levels at 3.55 and 3.61. Both of these hedge strategies (that also serve quite well as spec trades) provide very favorable risk/reward elements AND, perhaps most importantly, will allow you to get a good night’s sleep tonight because of their limited and identifiable risk.

Good luck tomorrow.

corn_bull_hedge

 

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