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Grain Spreads: Corn Gameplan

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In full disclosure, I was very bullish entering 2020 regarding corn and beans. The last 5 Presidential cycles revealed that corn and beans saw some type of sizable rally in those election years at some point, usually in the 1st or 2nd fiscal quarters. Until recently that prediction had me looking like a novice or fool, take your pick, as the highest levels for both grains were made in early January. In short they were made pre pandemic. If 2020 has taught me anything, it's that there are multiple unforeseen Black Swans circling. Another one entered into the market in the form of a Derecho in early August in the Midwest, knocking down and snapping corn stalks in the major growing areas with the severe damage in Iowa. This more than anything changed the psychology of the trade and the fund net short position. It comes amid drought like conditions for much of August and insatiable corn and bean demand from China. Grains finally rallied. This week as harvest ramps up in earnest, we could see follow through pressure to the downside. Will the Derecho/drought damage be as severe as feared and lower ending stocks significantly on the balance sheet? Or will harvest pressure take over and funds revert back to a short position. I attached a December 20 Daily Corn chart. For those needing old crop hedges or those speculating that the market will go lower, I posit a few ideas. In my view if the market breaks, I believe corn will retest the 50 percent Fibonacci level of the recent rally to 349.6. You will also see the 345 level designated as the bottom of the gap from 8/24/2020. Funds love testing gaps over time in my opinion. It often seems as its not if but when. I caution though that this is an odd ball year and we are still over a month from the election. Therefore I would opt for a conservative strategy here and simply buy a December corn put with the caveat that if Dec 20 corn rallies and closes over 372.4, we are out of our short.

This image has an empty alt attribute; its file name is ZCZ20-Daily_09252020_031702pm-1024x471.jpg
December 20 Corn

Trade Ideas

Futures-N/A

Options-Buy the Dec 20 corn 360 put for 8 cents or $400.00. We will exit if the underlying futures rally and settle over 372.

Risk/Reward

Futures-N/A

Options-The risk is the price paid for the option which is 8 cents or $400.00 plus all commission and fees. Im projecting if we move towards the gap, we put an offer of 20 cents to take a collection of 1K minus trade costs and fees.

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Futures and options trading involve substantial risk and is not suitable for all investors. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. The information contained on this site is the opinion of the writer or was obtained from sources cited within the commentary. The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

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Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

312 957 8103

888 391 7894 toll free

312 256 0109 fax

slusk@walshtrading.com

www.walshtrading.com

Walsh Trading

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Chicago, Il 60604

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