In recent updates we’ve acknowledged that while the technical elements typical of major peak/reversal environments are present- waning upside momentum, frothy sentiment, potentially complete Elliott sequence- it’d be premature to conclude such a reversal as opposed to a still-long-term-bullish prospect that the price action down from 07-May’s 6.38 high is just a major (4th-Wave) correction ahead of a (5th-Wave) resumption of the secular bull.  At this point and until the market breaks the 5.140-to-5.00 support range needed to reinforce/confirm a peak/reversal count, traders are advised to be flexible to either directional outcome.

Indeed, from a shorter-term perspective, the combination of yesterday’s bullish divergence in short-term momentum above Thur’s initial counter-trend high from the extreme lower recesses of the two-month range reinforces and identifies recent lows and support between 5.14 and certainly 5.00 as important and objective risk parameters from which non-bearish decisions like short-covers and cautious bullish punts can now be objectively based and managed.

IF then past couple months’ thus-far-lateral price action is just a 4th-Wave, then tomorrow’s crop report could be the fuel to drive sustained, trendy, impulsive behavior higher to eventual new highs above 6.38.  If, conversely, this month’s decline is the 3rd-Wave of a major reversal lower, then obviously the market’s got to blow away this lower-5.00-handle-area.  Per such, the risk/reward merits of non-bearish decisions “down here” are favorable and objective.

These issues considered, shorter-term traders are advised to move to a neutral-to-cautiously-bullish stance from current 5.50-area prices OB, reversing this stance and exposure on a relapse below 5.14.  Longer-term players are advised to pare bearish exposure to more conservative levels with commensurately larger-degree strength above 6.15 on a closing basis required to neutralize remaining exposure.  Longer-term players also have the option of paring or neutralizing bearish exposure at current levels and exchanging whipsaw risk (below 5.14) for steeper nominal risk above 6.15.  For a cautious and favorable risk/reward opportunity heading into tomorrow’s key crop report, please see the call diagonal strategy below.


This long-gamma call diagonal strategy involves buying the Aug Short-Dated 5.80 Calls around 20-3/4-cents and selling the Dec 6.80 Calls around 18-1/2-cents for a net cost of about 2-1/4-cents and provides:

  • a current net delta of +15%
  • OK gamma ratio of 2:1
  • most importantly, negligible risk if the underlying Dec contract tanks below 15.00 in a dramatic 3rd-Wave
  • upside profit potential of 1.00 on a sustained 5th-Wave resumption of the secular bull above 6.38.

As always, the bane of long-gamma diagonal spreads is theta (time decay) risk.  If tomorrow’s report is a complete dud and the market just wafts aimlessly laterally, the long Aug short-dated call is going to lose premium more quickly than that of the Dec calls.  Eventually, if held long enough under aimless lateral condition, the long call could erode to zero, leaving a naked short position in the Dec call that then could expose extreme risk.  THIS SHOULD NEVER BE ALLOWED TO HAPPEN.  With more than three weeks following tomorrow’s report before the Aug short-dated options expire, the market has plenty of time to show its directional hand.  If it doesn’t either rally sharply or continued lower sharply, this trade should be covered at what should be a small losses by mid-to-late next week.

Please contact your RJO representative for an updated bid/offer quote in the Aug Short-Dated 5.80 / Dec 6.80 Call Diagonal and good luck on tomorrow’s numbers.

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