Monday, February 29, 2016

Is it Time to buy New Crop Calls in the Ags? Part 2

In the last post I gave the argument for the possible upside in corn and soybeans. Let's talk about tactics.

Which to concentrate on? Nov beans are 2.36 times Dec corn. That's within the average range. However other things currently make corn more attractive to farmers. Input prices, particularly fertilizer, are way down, and corn uses a lot more of these. The USDA is forecasting a two million acreage increase in corn and for soybean acres to be down marginally (some analysts disagree with that). So I tend to favor beans. However, corn is usually more susceptible to poor weather, so you can really take your pick.

The option volatilities really do make the trade feasible. Nov bean ATM vols are running at about 15% versus the 17% range for most of the past year. OTM vols are of course higher (10 calls are 17.5%) but still quite cheap. Very far OTM calls are even higher. I wouldn't do a spread trade tho. If and when a crop problem occurs, all vols and trading costs will go up. This will make it costly to take profits.

If you want to do corn, Dec ATM calls are about 21%. That's within the range of the past six months.

I am buying a half position of ZSX100C at the current market and another half at 10. Beans are under pressure because of the favorable conditions in South America. This is providing a good entry point.

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