"I'm trying to explain degree of difficulty does not get you more points," Calipari said. "Like the harder shot you try to take, there's no four-pointers, unless you get fouled on a three-pointer. So, that's a hard one for him. I'm trying to get him to just make easy plays." - John Calipari
So what can John Calipari teach about grain marketing? What he is trying to say is that there are easy ways to win games and hard ways to lose games. A win is a win, so why not try easier plays? The analogy works the same in the realm of grain marketing. There are times when the odds favor you to make sales and there are times when it works against you. If you need to pull the trigger but don't see much reward for your risk, then why not look at other asset types which could be substituted for corn or soybeans? Why make a hard trade when you can make an easy trade? In the paper trading world, it is possible to improve your odds of success sometimes by switching to another asset which has more potential to achieve the results you are looking for.
Why Use Synthetic Positions
I like to couple the cycle counts which I marked on the below chart with sentiment readings. When you take a trade at a cycle low when sentiment readings are excessive, the risk of the market going against you becomes very small. This usually only happens at intermediate and yearly cycle bottoms which normally happen 2-3 times a year. I only recommend synthetic trades at yearly and intermediate cycle bottoms.
Long or Short Oil
Once the crop size is determined, prices tend to flatten out for months at a time. There is no longer fear of running out, especially in large surplus years such as this year, so prices will not rally enough to create good marketing opportunities. It is important to use cycles and sentiment to determine the optimal times to sell put options. You hope to time your sale at an intermediate cycle low, and you want to catch the market when sentiment readings are extremely oversold. Just like long and short futures, selling options is marginal so we want to do what we can to avoid margin calls and to stack the odds in your favor. Managing the trade risk is easier at cycle bottoms also. Prices which are not at an extreme have a 50/50 chance of going up or going down. I don't like those odds.
What follows is the set up for the synthetic corn long position using wheat puts we did back in December. Why would I recommend a bullish strategy using wheat when wheat was at the lowest price in 10 years? The two main reasons were the cycles and sentiment.
The multi year wheat chart below shows that prices were at their lowest level in 10 years. I recommended selling wheat puts when the price was at $4.02.
But Mr. Wade...... Isn't this speculating? Technically speaking, I suppose it is. It certainly isn't hedging. Technically speaking, you are speculating the day you drop your planter into the ground, but you plant anyway. These positions which I write about are tied to your farming. They create value. The risk is defined, just as your farming is when you take a loan. My goal is not to create more risk, and I don't believe this kind of trading does.
Keep an eye on crude oil. I am expecting the parameters will be in place to do a synthetic oil long trade in the next week.