RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

In yesterday’s Technical Blog we detailed the pertinent technical levels and risk parameters around which short and longer-term directional biases and exposure can be objectively based and managed.  It is from this technical construct that the hedge option strategy below are structured.

MAY CORN & END-USER BULL HEDGE

Reiterating, May corn remains locked within the increasingly pivotal 5.,30-to-5.59-range, where a recovery above 5.59 is required to render this lateral range a corrective/consolidative affair and re-expose the secular bull while a failure below 5.30 will, in concert with stratospherically frothy bullish sentiment levels, expose a peak/reversal count that could be major in scope.  Especially headed into a report as critical and potentially impactful as tomorrow’s, we’re basing our bull hedge strategy on the premise that this market will MOVE AWAY from current 5.40-area prices in a potentially very sustained way.

BULL HEDGE:  MAY 5.40 – 5.60 CALL BAC SPREAD

As we believe the risk of a broader PEAK/reversal threat is growing, we don’t want to have a hedge strategy’s greatest risk/cost result from a sharp reversal below 5.30.  We believe this call back spread provides the answer  This strategy involves selling 1-unit of the May 5.40 Calls around 19-3/4-cents and buying 2-units of the May 5.60 calls around 12-1/4-cents for a net cost of around 4-3/4-cents.  This strategy provides:

  • a current net delta of +20%
  • favorable margins
  • fixed and maximum risk/cost of 24-3/4-cents if the underlying May contract settles at 5.60 on expiration 24 days from now on 23-Apr
  • unlimited, dollar-for-dollar upside hedge protection above its 5.83 breakeven point at expiration, and, most importantly,
  • fixed, maximum risk/cost of only 4-3/4-cents on ANY AMOUNT of reversal/collapse below 5.40.

DEC CORN & PRODUCER BEAR HEDGE

The hourly (above and daily (below) charts of the Dec contract show today’s a clear, accelerating break below an area of former resistance around the 4.60-area that should have held as new support IF this month’s relapse was a correction within the still-developing, major bull trend.  This continued, accelerating weakness reinforces our broader peak/correction/reversal count introduced in 22-Mar’s Technical Blog that could be major in scope given the extent to which the entire world has its collective neck sticking out on the bull side.

This continued weakness leaves 23-Mar’s 4.72-1/4 high in its wake as the latest smaller-degree corrective high this market is now minimally required to recoup to threaten a broader bearish count and perhaps even re-expose the secular bull.  Until and unless such strength is proven, we believe the market’s downside potential may be extreme straight away.  Per such, we’re identifying 4.73 as our new short-term risk parameter from which traders can objectively rebase and manage the risk of a still-advised bearish policy and exposure.

From a very long-term perspective, commensurately larger-degree weakness below 25-Jan’s 4.26 larger-degree Globex day-session low and key long-term risk parameter remains required to break the major bull trend that dates from Apr’20’s 3.57 low.  But we believe the clear break of that 4.60-area support candidate raises the odds of a broader reversal and eventual failure below 4.26.

PRODUCER BEAR HEDGE:  SHORT MAY SHORT-DATED 4.50 – 4.70 CALL SPREAD / LONG MAY SHORT-DATED 4.40 PUT COMBO

Since the market has now more obviously rejected and identified resistance in the 4.65-to-4.85-area, we can structure a more aggressive and favorable risk/reward bear hedge from that area.  Specifically, we recommend selling the May Short-Dated 4.50m 4.70 Call Spread for around 8-cents and buying the May Short-Dated 4.40 puts around 7-3/4-cents for a net cost of about “even”.  This strategy provides:

  • a current net delta of -58%
  • favorable margins
  • fixed, maximum risk of 20-cents on ANY rally above 4.70 (although cost/risk of this hedge can be reduced by covering after a technical recovery above our short-term risk parameter at 4.73
  • virtually unlimited, dollar-for-dollar downside hedge protection below its 4.40 breakeven point at expiration 24 days from now on 23-Apr.

Please contact your RJO representative for updated bid/offer quotes on these strategies and good luck on tomorrow’s numbers.

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