In recent updates we’ve discussed the market’s languishing price action that, from the middle-half bowels of the 6-month range, is hardly unusual. What this “NON-upside-impulsive” price action does however is reduce the odds of a more immediate bullish count and raise the odds of further lateral-to-lower prices in a continuation of the 6-month correction or reversal threat from the May highs.
As a result of 04-Nov’s bearish divergence in short-term momentum discussed in 05-Nov’s Technical Blog, we noted the market’s definition of 02-Nov’s 5.86 high and short-term risk parameter it now needs to recoup to mitigate a more immediate, if intra-range bearish count and resurrect a bullish one. To the downside, 16-Sep’s 5.36 prospective 1st-Wave high remains intact as our longer-term bull risk parameter, the failure below which will surely nullify the impulsive integrity of any bullish count and reaffirm the market’s reversion to at least the 6-month consolidation range and possibly a more directional correction or reversal below the pivotal 5.00-area that defines the key lower boundary of this range.
In effect, we believe the market has defined 5.36 and 5.86 as the key directional triggers heading forward. As producers have an inherent need to protect against price slides, we discuss a cautious but favorable risk/reward bear hedge we believe is most applicable from the market’s current position deep within the middle-half bowels of the 6-month range heading into the unknowns that could stem from this morning’s key crop reports.
PRODUCER BEAR HEDGE: SHORT DEC 5.50 – 5.60 CALL SPREAD / LONG DEC 5.35 PUT COMBO
This strategy involves selling the Dec 5.50 – 5.60 Call Spread for around 4-cents and buying the Dec 5.35 Puts around 4-1/4-cents for a net cost of about 1/4-cent and provides:
- a current net delta of -40%
- favorable margins
- maximum risk/cost of just 1/4-cent if the underlying Dec contract settles anywhere between 5.35 and 5.50 at expiration 17 days from now on 26-Nov
- fixed, maximum risk/cost of 10-1/4-cents on ANY rally above 5.60
- virtually unlimited, dollar-for-dollar hedge protection below its 5.34-3/6 breakeven at expiration.
In addition to recent languishing price action, if this morning’s crop report spits out bearish grease, this strategy will protect all downside damage below 5.35. Please contact your RJO representative for an updated bid/offer quote on this play and good luck on today’s numbers.