Posted on Jun 08, 2023, 12:06 by Dave Toth
While tomorrow’s crop report is not expected to have the impact of 30-Jun’s key report, it’s got the potential to either exacerbate early-Jun’s recovery as part of a slightly larger-degree correction within the new secular bear trend OR re-expose the major bear. The hourly chart below shows a bearish divergence in very short-term momentum that, given the market’s rejection thus far of the Fibonacci minimum (11.92) 38.2% retrace of May’s 12.86 – 11.35 decline, might have capped this correction at Tue’s 11.91 high. A recovery above at least this 11.91 level and preferably 19-May’s 12.04 corrective high is required to threaten a more immediate bearish count and perpetuate an intermediate-term correction laterally-to-higher. Per such, shorter-term traders are advised to se 11.91 and/or 12.04 as short-term parameters from which to rebase and manage the risk of a still-advised bearish policy and exposure.
On a broader scale, on a glance at the daily (above) and weekly (below) log scale charts of the Nov contract is needed to see that the major downtrend remains as the dominant technical element. Early-Jun’s bounce thus far is obviously grossly insufficient to conclude anything more than another interim corrective hiccup within the new secular bear market. However, and until 31-May’s 11.30 low is broken, early-Jun’s recovery easily falls within the bounds of just the (A-Wave) start of a correction that’s got more lateral-to-higher prices in the weeks ahead before the secular bear trend resumes.
On this larger scale, it’s clearer and easier to acknowledge larger-degree strength above 12.51-area former support turned-resistance for longer-term commercial players to nullify a bearish policy and exposure. For shorter-term traders with tighter risk profiles however, we have to account and allow for what could be some volatile, aimless, consolidative chop until 30-Jun crop report settles the issue.
These issues considered, a bearish policy remains advised with a recovery above at least 11.91 and preferably 12.04 for shorter-term traders to pare or neutralize exposure in order to circumvent the eights unknown of a larger-degree correction higher. Commensurately larger-degree strength above 12.51 remains required for longer-term commercial players to follow suit. Against this potentially volatile backdrop in the weeks ahead, below we discuss cautious but favorable risk/reward strategies for both traders and hedgers to position for or hedge against a more protracted move stemming from tomorrow’s key crop report specifically.
BULL SPEC/HEDGE: JUL SD 12.00 / NOV 14.20 CALL DIAGONAL
With 15 days to go before the expiration of the Jul SD options, this market has plenty of time to “perform” either way before theta risk associated with long-gamma strategies takes its toll. The call diagonal strategy below involves buying the Jul SD 12.00 Calls around 11-1/4-cents and selling the Nov 14.20 calls around 10-1/2-cents for an initial cost of about a penny. This strategy provides:
- a current net delta of +30%
- whopping 7:1 gamma ratio
- negligible risk if the major bear trend in the Nov contract resumes
- significant profit potential of up to $2.20 if the market reverses the major bear trend.
As always with such long-gamma diagonal strategies, the biggest risk comes from merely lateral, flat-lining price action where the long nearby closer-to-the-money option has greater time decay risk (theta) than the deferred-month, farther-out-of-the-money option. Ultimately, left unmanaged, the long call could expire worthless, leaving a naked short position in the Nov 14.20 call that would expose infinite risk. Of course, we NEVER let this position get to such a point. If this market doesn’t MOVE sharply higher as a result of tomorrow’s crop report, then by mid-to-late next week this strategy should be neutralized for what should be a small loss.
BEAR SPEC/HEDGE: JUL SD 11.50 / NOV 10.00 PUT DIAGONAL
The put diagonal strategy below is the opposite of the call diagonal strategy discussed above, buying the Jul SD 11.50 Puts around 8-7/8-cents and selling the Nov 10.00 Puts around 7-1/2-cents for a net initial cost of about 1-1/2-cents. This strategy provides:
- a current net delta of -13%
- enviable 6:1 gamma ratio
- negligible risk if the underlying Nov contract reverses sharply higher
- significant profit potential/hedge protection of up to $1.50 if tomorrow’s report incites a resumption of the secular beer trend straight away.
Here too, the greatest risk to this strategy is flat-lining price action, where theta risk will eventually see the long 11.50 put erode to zero if the market doesn’t resume its major bear. This would leave a naked short position in the Nov 10.00 puts that poses infinite risk if left unmanaged. If the market doesn’t resume its major bear trend as a result of the data coming from tomorrow’s key report, then by mid-to-late next week this strategy should be covered for what should be a small loss.
The beauty of both the put diagonal and call diagonal is not only their very favorable risk/reward qualities, but also their ability to allow the owners to get a good night sleep tonight AHEAD of tomorrow’s key crop report. Please contact your RJO representative for updated bid/offer quotes on these strategies and good luck on tomorrow’s numbers.