RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

Posted on Jan 10, 2023, 10:32 by Dave Toth

In 04-Jan’s Technical Webcast we discussed a number of peak/reversal-threat elements in the Mar soybean market that also apply to the new crop Nov contract.  We acknowledge that Thur’s key crop reports pertain mainly to last year’s crop and the Mar contract, but the same peak/reversal-threat factors afflict the Nov contract as well, like:

  • the market’s precarious position at the extreme upper recesses of the past year’s range amidst
  • historically frothy sentiment/contrary opinion levels
  • a bearish divergence in short-term momentum that has identified 30-Dec’s 14.28 high as one of only short-term significance thus far but serves as a tight but objective bear risk parameter
  • the market’s failure thus far to sustain late-Dec’s “breakout” above the past FOUR MONTHS’ resistance around the 14.0-to-14.05-area, and
  • clearly waning upside momentum over the past TWO MONTHS.

A break below 19-Dec’s 13.78 larger-degree corrective low remains required to CONFIRM the bearish divergence in daily momentum and threaten Jul-Dec’s entire 12.17 – 14.28 rally enough for even longer-term commercial players to neutralize all bullish policy and exposure and reverse into a new bearish policy and exposure.  Given the potential magnitude of Thur’s key crop reports that could see the Nov contract blowing out EITHER 30-Dec’s 14.28 high or 19-Dec’s 13.78 low and our key directional flexion points, any directional bet made prior to this report must 1) be conservative in its risk assumption and 2) provide favorable risk/reward merits.  We discuss just such a strategy below.

BEAR SPEC:  MAR SHORT-DATED 13.70 / NOV 11.80 PUT DIAGONAL

The tremendous benefit of considering new crop directional exposure so early in the new year is that it allows us to use the CME’s short-dated options on the new crop Nov bean contract.  Especially around an acute technical setup like we’ve defined above, the gamma advantage a shorter duration short-dated (SD) option has over the Nov option is extraordinary and provides the opportunity to structure a very, very risk/reward option strategy.  This gamma advantage results from but comes in exchange for theta (time decay) risk as the long option has much less time to perform.  But when such a strategy is initiated in the hours before key crops reports that have the potential/likelihood of impacting prices dramatically like this Thur’s reports, the odds of such “performance” improve.

Given the key technical levels of 14.28 and especially 13.78 in the Nov contract, we recommend buying the Mar SD 13.70 / Nov 11.80 Put Diagonal.  The Mar SD 13.70 Puts look like they can be purchased for around 17-cents while the Nov 11.80 Puts look like they can be sold for around 15-cents for a net initial cost of about 2-cents.  This strategy provides:

  • a current net delta of -24%
  • a whopping 5:1 gamma ratio
  • negligible risk if the underlying Nov contract explodes higher above our 14.28 bear risk parameter
  • profit potential of up to 1.90 if the market sustains a major reversal lower below 13.70.

While the P&L graph below makes this strategy look like a no-brainer, it is crucial to understand that this strategy poses infinite risk if not managed correctly if the market simple treads water boringly in the weeks ahead.  As the Mar SD puts expire in 45 days while the Nov puts don’t expire until 27-Oct, it’s not hard to envision the Mar puts expiring worthless if the market doesn’t reverse lower, leaving an eventual naked short position in the Nov 11.80 puts that would/could expose unlimited risk.  Per such, it is crucial to understand that this strategy is based upon a technical construct that warns of a sharp reversal lower SOON, perhaps confirmed as early as this Thur, ahead of sustained and potentially major losses.  If this market doesn’t behave per this count, but rather languishes laterally over the next few weeks that could reinforce and maintain an alternate BULLISH count, then the specific rationale for this strategy is nullified, warranting its cover for a small loss.  But as there will be a month-and-a-half to expiration of the Mar SD Puts after Thur’s reports, traders will have plenty of time to address non-performance and cover this strategy.  If the underlying Nov contract fails sharply below 13.78 as a result of Thur’s key reports, owners of this put diagonal will most certainly be in the driver’s seat.

Please contact your RJO representative for an updated bid/offer quote in the Mar SD 13.70 / Nov 11.80 Put Diagonal and good luck on Thur’s numbers.

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