Wheat just broke below its previous intermediate cycle low which was back in December. It was at this time back in December when I last recommended selling puts as a strategy to help your corn marketing's. There needs to be several things in play before I recommend selling puts. I only recommend this strategy at the beginning of intermediate cycles because short puts are marginal. I want the underlying asset to take off to the upside because paying margin calls is not the easiest thing for most people to do.
80% of all options expire worthless, so it is usually the option seller, not the option buyer who consistently makes money. Selling at ICL's give the best possibility of avoiding margin calls. The largest gains in any market are made in the first few weeks after the beginning of a new intermediate cycle.
In the chart below, wheat broke below its previous intermediate cycle low. This should be proof that a new intermediate cycle is underway. The RSI and Stochastics are both turning up.
Sentiment levels for most asset classes are near neutral levels, but Agriculture as a sector is considered low risk.
Wheat sentiment in particular is very low. The optimism index just dropped below 20. Since 1991, the optimism index has been at or below this level 100 trading days. In 80 of the 100 trading days following the times when wheat was below 20, wheat traded higher with an average return of 7.4% 50 days later.
Perhaps the biggest reason to feel bullish about wheat is that smart money is bullish as well. Commercial hedgers are considered the smart money of the commodity world, having an excellent track record how to trade the underlying asset. Commercial hedgers are now net long near 100,000 contracts which is not far off record highs. This is very bullish.
For every 5000 bushels of corn or soybeans you wish to apply this strategy towards, sell one 4.50 July put. This put will expire in 7 weeks on June 16. You will collect .31 per bushel. As long as wheat closes at or above $4.50 by June 16, you will keep all of the premium you collect. If it falls below $4.50, then you will have to cover that amount. Say the price is $4.35 on June 16, you have to pay .15 per bushel back, but you would still keep .16. From that standpoint, you would still gain on the strategy. The only way you can lose money really is if the price falls below $4.19. Given where we are with the cycles, the oscillators, the sentiment and the commitment of traders, I feel confident losing money won't happen. Why did I choose $4.50? Because that will be close to where the 200 day moving average will be on June 16, and because that will be near where the previous high was back in early April. If wheat prices break above that level, (which I expect it will), then it will probably move back to the $4.75 area.
I am officially applying this strategy to help my soybean positions. I am presently 50% sold, but I am applying this strategy to 100% of my soybean positions. This should net me an additional .31 per bushel. You can apply it to corn, soybeans, and yes even wheat!
I wrote last week that I expected to see a bounce in soybeans any time and an advance is now underway. I wanted to take a moment to take a different view of the Nov bean contract. Below is a weekly chart, not a day chart of Nov Soybeans. You can see that beans dropped to the 200 week moving average and turned higher. The weekly stochastics and RSI oscillators are turning bullish. Barring a major news event, this looks to be setting up a strong rally. I don't know if beans can make new highs or not, but we should have a move to at least the $9.80 level, and I would not be surprised if we reached $10.00.
I don't have to explain why you may be feeling poor these days. The following two charts probably explain it all. The first is the best known agricultural ETF called DBA. DBA reflects a broad basket of agricultural commodities, such as corn, soybeans, wheat, sugar, hogs, cattle, coffee, cocoa. It made an all time low today.
Looking back to 2007, you can get an idea of why the math has become so much harder to make work on the farm in recent years.
DBA's counterpart ETF is called JJG. JJG is an equally weighted grain ETF which tracks corn, soybeans and wheat only. While it has yet to make a new all time low, it is not far away from it.
This is why I am looking to other more aggressive trading strategies to help create value in basic ag commodities, such as three way spreads, selling puts and synthetic positions. If you are selling at the bottom third of the market which statistics show most farmers do, its going to be tough to make sales at profitable levels.
Last week I said "I would not be surprised to see a sell off for a few days after the report, but the market turn around quickly because the market simply ran out of sellers.". I did not mean we would see new highs, but I think we will get a pretty decent bounce in the weeks ahead.
November soybeans will probably signal a buy signal today on the CCI, and sentiment readings have dropped near the 20 level that I mentioned in last weeks post. Extreme bearish sentiment is the fuel of most market rallies.