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.

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

Last week an old friend called me with the idea of positioning long for the US growing season. Here are my thoughts. This is a pure risk/reward type of trade (i.e. with less than a 50% probability of success, but with a big payout if it works.).

Corn, wheat and the bean complex are all down a lot. This is fundamentally based; the world has had good to great crops for two years. Stocks levels are high. The speculative money has left commodities, and is actually somewhat short. It's hard to see US acreage down much, so we may get another bin buster this fall.

However....
We may not. We are currently in a extremely high ENSO period. The US NOAA is forecasting that these el Nino conditions will dissipate this summer and may well bring on a la Nina event in the fall. Here is a list of years since 1950 in which the ENSO has fallen by at least 1.0 from FEBMAR to AUGSEP, along with corn yields relative to trend:

	ENSO Change	Corn Yield
1954	-1.346	-10.6%
1958	-1.152	-0.9%
1964	-1.012	-10.8%
1970	-1.473	-12.3%
1973	-2.558	4.6%
1978	-1.35	7.2%
1983	-2.543	-22.9%
1988	-1.949	-24.7%
1995	-1.296	-9.3%
1998	-3.315	1.8%
2010	-3.339	-0.7%

So the average of the 11 years is  (7)%. The average for soybeans since 1960 is (4)%. Probably more important for this trade, the crop was bad over half the time.

So this smells like a pretty decent option position to me. Let's look at the specifics of the options market.

MORE TO COME

How are the Blog Positions Doing

I started this blog in October of 2015. About a month later, I started making actual recommendations. In all cases, I actually put my own money in these recommendations. Here's a little more detail about how I invest.

- I only look at notional position size. Leverage does not appeal to me. This means that I normally trade smaller commodity positions than most people. I do the same on the short side.
- All my equity trades are alpha-based. Basically I look at the trade vs. the ETF SPY. I do have another account in which I have some broad-based mutual funds, but that is not the point of this blog. BTW, I have held one mutual fund for over 30 years!

So let's evaluate the trades I have on here:

Long Southern Peru Copper, short copper metal. Put on Nov 13, 2015. This has done decently:
SCCO   -3.5%
SPY      -7.6%
Copper -1.2%  >> net gain of 5%

Long Dean Foods. Put on Dec 12, 2015. This has been my big winner:
DF         +19.9%
SPY       -5.1%  >> net gain of 25% wahoo!

Long Alcoa Preferred. Put on Oct 26, 2015:
AApreferred -5.2% (incl pref div)
SPY              -6.3%  >> net gain of 1%

Long Dec 2018 Crude (WTI)
I have traded this position quite a bit, but the original was put on on Dec 7, 2015 at $53. So it has a loss of -12.5%.

I also have on a cocoa options position. This is rather complicated, and I'm not going into all the details. It's basically short gamma, neutral delta.

I hope to have most of these on for much longer. I also plan to buy Nickel either using the metal or Norilsk. More in the next post.

Round Trip for Emerging Markets

With all the sturm and drang about emerging markets these days, you would think they might be at all time lows. You would be close to being right. The largest emerging market ETF (EEM) started trading in 2003. Not coincidentally, that was the beginning of a major bull for EM. It's all been reversed:

So we had a classic bubble. A major asset class almost tripled on a relative basis and then did a round trip.

Are we at value? It's always hard to catch a falling knife, and my sense is there is no risk/reward in this trade. Remember, we haven't had much in the way of actual defaults in EM yet (or in DM for that matter). So far it's just been the slowing of growth and possible financial trouble. Wait till some of these guys actually default (I mean you Venezuela et. al.).

Just for fun I wrote a stock options valuation calculator using the Shiny package in the R language. I really just wanted to see how Shiny worked, but the result turned out to be quite useful. Check it out here.
Note: Shiny isn't the most compact code, so the page will take a few seconds to load, but once it loads it runs great. Email me or comment below if you have any thoughts or ideas for improvements.