Corn Option Strategies to Engage Qrtly Grain Stocks Report

September 26, 2018 11:24AM CDT

In Fri's Technical Blog we discussed Thur's bullish divergence in admittedly short-term momentum above 3.52 as a very early indication of a base/reversal threat that could evolve into a major event.  Subsequent gains this week reinforces this count and ingrains 18-Sep's 3.42 low as one of developing importance and THE short-term risk parameter this market is now obligated to break to mitigate any such base/reversal count and reinstate the past four months' major, if intra-range downtrend.

Corn Dec '18 60 Min Chart

Corn Dec '18 Daily Chart

Our broader base/reversal count remains predicated on:

  • the market's recent proximity to and rejection (once again) of the lower-quarter of the 4-YEAR lateral range amidst
  • a return to historically bearish sentiment levels
  • an arguably complete 5-wave Elliott sequence down from 31-Jul's 3.89 high that
  • to 18-Sep's 3.42 low spanned a length exactly 61.8% of May-Jul's preceding 4.30 - 3.50 decline that
  • warns that the entire May-Sep decline from 4.30 to 3.42 is a complete 3-wave and thus corrective structure.

Commensurately larger-degree proof of strength above at least 05-Sep's 3.70 larger-degree corrective high and key risk parameter would be the next reinforcing evidence of this major base/reversal count with subsequent gains above 31-Jul's 3.89 corrective high a then-obvious confirmation of the reversal.

Further reinforcing evidence of a broader bullish count would come in the form of labored, corrective, 3-wave behavior on subsequent relapse attempts.  Given the market's uninterrupted recovery from 18-Sep's 3.42 low, traders must also acknowledge the prospect and prepare for an interim corrective rebuttal to the past week's rebound that would provide a preferred risk/reward buying opportunity if it survives the retest of 18-Sep's 3.42 low.

These issues considered, shorter-term traders remain advised to maintain a neutral/sideline position while longer-term players are OK to maintain a cautious bearish policy with strength above 3.69 still required to totally negate that prior bearish count and warrant its cover.  Above 3.69 the market's upside potential should be approached as indeterminable and potentially extensive.

While the market remains "early" in this prospective base/reversal count that could easily include a 10-cent corrective relapse and a preferred risk/reward buying opportunity, the spec option strategies discussed below are preferred for the time being as they're lower risk and provide some staying power to weather whipsaw risk.  We also included a bull-hedge for end-users who now need to be more concerned about a reversal higher.

Corn Weekly Chart

END-USER BULL HEDGE:  SHORT NOV 3.60 / 3.45 PUT SPREAD - LONG NOV 3.70 CALL COMBO

This strategy involves selling the Nov 3.65 - 3.50 put spread for about 6-1/4-cents and buying the Nov 3.70 calls for about 6-1/4-cents for a net cost of "even" and provides:

  • a current net delta of +0.66
  • favorable margins
  • maximum risk/cost of 15-cents on ANY decline below 3.50
  • unlimited, dollar-for-dollar upside hedge protection above its 3.70 breakeven at expiration 30 days from now on 26-Oct.

Bull Hedge Chart

This strategy involves buying 1-unit of the Oct week-2 3.70 call for around 4-3/4-cents and selling 1-unit of the Dec 3.85 calls around 4-3/4-cents for a net cost of "even".  This strategy provides:

  • a current net delta of +0.13
  • 2:1 gamma ratio
  • negligible risk of the underlying Dec contract collapses
  • profit potential of 15-cents on a sustained rally above 3.85.

The biggest risk with long-gamma diagonal spreads is lateral, boring price action as the gamma advantage from the long option comes in exchange for time decay risk, or theta.  If Fri's report is a total dud and the underlying Dec contract simply flatlines, then we act on the premise that the long Oct week-2 3.70 calls will erode to zero.  The remaining naked short Dec 3.85 calls would then expose virtually unlimited risk if not managed appropriately and a broader bullish technical outlook remains intact.  Under such circumstances, by mid-to-late next week this trade should be covered for what should be a small loss.

Bull Spec Chart

This strategy involves buying 1-unit of the Oct week-2 3.55 puts around 3-1/8-cents and selling 1-unit of the Dec 3.40 puts around 2-1/2-cents for a net cost of a little under a penny.  This strategy provides:

  • a current net delta of -0.11
  • 2.5:1 gamma ratio
  • negligible risk of the underlying Dec contract rallies sharply
  • profit potential of 14-cents on a sustained decline below 3.40.

As always with long-gamma diagonal spreads the biggest risk comes from lateral, boring price action as the gamma advantage from the long option comes in exchange for time decay risk, or theta.  If Fri's report is a total dud and the underlying Dec contract simply flatlines, then we act on the premise that the long Oct week-2 3.55 puts will erode to zero.  The remaining naked short Dec 3.40 puts would then expose virtually unlimited risk if not managed appropriately.  Under such lateral ennui circumstances by mid-to-late next week this trade should be covered for what should be a small loss.

Please contact your RJO representative for updated bid/offer quotes on these strategies.

Bear Spec Chart

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

The risk of trading futures and options can be substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that RJO Futures believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgement at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

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.

Distribution in some jurisdictions may be prohibited or restricted by law. Persons in possession of this communication indirectly should inform themselves about and observe any such prohibition or restrictions. To the extent that you have received this communication indirectly and solicitations are prohibited in your jurisdiction with registration, the market commentary in this communication should not be considered a solicitation.