Corn Approaching A Major Low?

[DaveT]

CBOT Corn has come down close to long-term support levels on good growing weather this summer.

Seasonals suggest a bottom around August, often before the August S/D report, prior to harvest low and post-arvest rally.

A record crop of 10.6 Bn Bushels+ is forecast, but there's still a lot of the season left, and yields are not guaranteed.

World Supply/Demand is still historically tight , with smallest world ending stocks since 1976-77.

See on my weekly chart, with COT graphs overlaid, the commercials have turned net long this week and have been buying into this decline, while the funds (large specs) are still net long and may have more to unload before this bottoms.

As the Commercials are always diametrically opposed to the funds, when the two lines cross and then reverse direction (ie, Commercials start selling and Funds start buying) this often marks the low.

In Options, deferred month calls (eg, Mar05 270 call @ 10c) are cheap and have low IV.

Comments and further analysis welcome

 

[DaveT]

Corn continues to fall, but I note several reasons for a pending low :

1) Funds will now be near flat/ net short

2) RSI on daliy is near 20 - the low end of the 60-20 downtrend range.

3) RSI on weekly is near 30 - historically marking major lows. (see chart)

4) Monthly shows prices near to long-term support levels

5) Monthly long-term uptrend line is close to being tested.

6) Forecasts for a bumper crop are getting ever larger - now talk of 11-12 billion bushels.

7) Late-July/Early Aug is historically a time of major trend change.


See my daliy (March 2005) weekly and monthly analysis below :

Note : On the monthly , I've calculated the % depth of each retracement of the 2000-2004 bull phases, each giving a retracement in the 80-90% region. Currently we are at 85-86% from the Spring 2004 highs....

 

[TWI]

Grains have all been doing the same thing lately.
Are these macro moves we're seeing due to fund money moving in and out of sectors? Seems likely.
It looks very much technically driven selling right now and it still looks like a one way street. Better to wait for stability before loading up.
Carefully analysing all the fundamentals at the moment is probably the wrong thing to do as we are in a macro game that at this time is saying "sell grains."
I have no doubt however that a great opportunity is approaching to fill yer boots.

 

[DaveT]

Thanks Twalker for your comments -

I'm considering purchasing long-term call options (eg Mar 05) ( slightly out-of-the money) as a safe way to capitalise on a post-harvest recovery/rally.

 

[TWI]

I would be almost tempted to write puts at levels where I would be happy buying this market.
The method I have seen used by commodity scale traders is to buy into these declines when the market starts to look cheap at regular intervals on the way down and sell regular intervals on the way up so capitalising on the volatility at or around the lows. If you know the scale buy levels then you can write options at those ahead of time and take premium, while having no problem to take long assignment if they are otm. It can get painful and you need to plan for much worse declines than even your worst case. Also need to be very aware of market carry and avoid large carry markets but i have seen this method used very profitable in a number of markets.
Original ideas sprung from a book called, of all things, you can't lose trading commodities...Well, not sure about that, but people have built on those ideas since and I do know people who do well out of them.

 

[DaveT]

Interesting technique. I haven't dealt much in options thus far, so I am not an authority on the subject by any means.

Shouldn't one always buy options in markets with low implied volatility, and sell options in markets with high implied volatility?

Is Corn's IV low or high at the moment? (I don't have access to this data)

 

[TWI]

I cannot comment on the vol in corn at the moment because I have not been in the market for some time. Essentially what you say is correct regarding IV, if you are trading volatility, but for a scale trader writing options is more about taking any premium as they will take the position at that price anyway, they will write puts to get into a long and then calls to get out, if the price does not get there then it is OK because they keep premium anyway.
It is not a technique I have much experience with and I have heard that during the bear market in coffee some scalers were finished off completely as they did not budget for it to go quite so low or have to take it through such a long period of time and carry. So you have to be careful and sometimes have deep pockets.
I have run scale simulations in a number of markets such as Silver, Copper and Cocoa and it has shown real potential, even without the options play.
I seem to remember a free website that gave you al the historical volatility data and where it is in the range but not sure what URL is. Maybe somebody knows here.

 

[minx]

Thanks Twalker for your comments -

I'm considering purchasing long-term call options (eg Mar 05) ( slightly out-of-the money) as a safe way to capitalise on a post-harvest recovery/rally.

Do you mind if I ask who you trade commodity options through. I'm doing futures at present but I'm worried about things like the sumitomo copper scandal, middle east in Oil and BSE on Feeders/Live Cattle mkts and/or any combination of disasters with the markets.
Do you find them to be quite efficient in pricing and in profit expectation?
Thanks

 

[DaveT]

Minx -

I currently trade with a spread-betting company, who offer spreads on commodity options.

Efficency of pricing and profit expectation. I think that all depends on how you view the market and the speed and/or consistency of movement of the underlying futures.

Options can, ofcourse, be used to profit from trending OR static markets.

I.e Buy options ONLY if you are sure of trending movement through the strike price over the life of the option.

Sell options if you think the market will remain in a trading range, thereby ensuring your stike price never gets hit.

A good strategy IMO, when buying out-of-the-money options, is to have an inital target at DOUBLE the premium, then review the market, possibly rolling over to a further-out strike price, thereby creating a free trade.

 

[minx]

I currently trade with a spread-betting company, who offer spreads on commodity options.
Efficency of pricing and profit expectation. I think that all depends on how you view the market and the speed and/or consistency of movement of the underlying futures.
A good strategy IMO, when buying out-of-the-money options, is to have an inital target at DOUBLE the premium, then review the market, possibly rolling over to a further-out strike price, thereby creating a free trade.

I'm guessing that finspreads right? I've always wondered about commodity options with them. I'd be doing very basic plays, calls instead of long futures and puts for short futures. At present my analysis is at the 'is it going up/down/sideways' stage of development and the options were just to protect against multiple day limit moves against me and with options at least I can quantify my risk quite easily- I wont be writing (yet!).
As I'm at/near the beginning of my options learning curve can you tell me is it better to buy out/at/in the money calls if I think Corn (to continue the discussion) i going to rise?
Thanks for any help you can give

 

[DaveT]

Minx -

IG Index actually.

Re Corn, there are probably several option strategies one could employ to play a rise in the market from here.

Out-of-the-money calls bought naked can represent good value, but the strike price has to be attainable, and the expiry month should be carefully considered.

Once the futures contract reaches above the strike price, the options should, all things being equal, move one-for-one with the futures.

 

[DaveT]

CBOT Corn -

Bought some March 250 Calls today @ around 10c mid.

Mar 05 futures @ 239, so that's 11 cents out-of-the-money

Reasons?

1) seasonal low date close
2) Major Monthly and Weekly trendline support ALMOST touched.
3) Mar 05 daily shows a small double bottom and bullish RSI divergence.
4) Late strength into the close today.

Target for the Mar 05 futures = Overhead gap at 278-283.

Plenty of time for the calls to come good. (March expires late Feb 05)

Could it go lower? Maybe, but these calls are good value right now , IMO.

See Mar 05 Corn chart below:

 

[minx]

Minx -

IG Index actually.

Cant see any commodity options on the IG trading platform, only futures :?:

 

[DaveT]

Minx -

IG offer a wide range of commodity , currency and index options.

You have to phone through for the spreads and prices ; they do not display them on the site.

Check out the dealing guide (Download from site) for the full list.

 

[minx]

Minx -

IG offer a wide range of commodity , currency and index options.

You have to phone through for the spreads and prices ; they do not display them on the site.

Check out the dealing guide (Download from site) for the full list.

Aha! Thanks a lot DaveT!!
Do they quote in minimum $ per point on the options or can you bet any size you like? (£1per point, etc....)
Minx

PS- Apart from IG does anyone know where you can get commodity options prices??

 

[DaveT]

Yes, they do stipulate a mimumum bet for each option - it's in the dealing guide.

For example, corn options IG minimum bet is $50/pt

If you want delayed market prices in general for commodity options , try :

www.futures.tradingcharts.com

www.futuresource.com

 

[DaveT]

Corn is now stabilising after touching long-term trendline support this week.

My March 250 calls are steady at 9-10 cents.

I'm expecting a choppy recovery from August to December on seasonal and other factors.

 

[minx]

Corn is now stabilising after touching long-term trendline support this week.

My March 250 calls are steady at 9-10 cents.

I'm expecting a choppy recovery from August to December on seasonal and other factors.

Does look like support is forming, will be interested to see how your calls do over the coming weeks. Are you in for the long term? Do you use an options calculator to price them b4 you take a price from IG?

 

[jklondon]

does look interesting - having been looking at commodities for a while - only worried about IG screwing me over on the spreads for such an instrument - anywhere where I can compare what the fair value for the options should be ?

 

[DaveT]

Minx -

I don't use an options calculator per se - I just observe the mid-price from Futuresource and also check the latest IV (implied volaitlity) at www.bohlish.com.

I am viewing this as a potential long-term trade (ie. possibly thru December), but I will review the trade if and when the premium doubles.

jklondon-

IG option spreads can be quite wide (it is variable depending upon liquidity of contract etc.), but if there's good value, and I see the potential for a good return (ie 200-500%+), I would just accept the spread and be patient. Spreads are only a real pain when short term trading, anyway, IMO.

The main sites I use for option pricing and info are :

www.futuresource.com
www.bohlish.com
www.oio.com