Yesterday, I outlined an option strategy on the opportunities page to provide some protection against a potential leg lower the market could make. I wanted to discuss the option strategy a bit further to attempt to better explain some things about taking that position. Here is why this position makes sense to me.
This position could be used as a cross hedge. By this, I am saying that you could hedge corn and wheat using soybean contracts. With the charts below, I am attempting to diagram that corn for the most part is grinding lower. In addition, it is .63 below its 200 day moving average. It has traded that wide 4 previous times which was followed by a counter move. Any move lower would be very limited. In addition, this contract has never traded lower. I also believe wheat looks more like it could have a small bounce.
Soybeans are at their 200 day moving average and an area of support. This is an actionable place professional traders would look at to take a position because there is room for it to move.....higher or lower. There is a lot of room lower this position could go. If that makes you uncomfortable, then buy the option. My outlook improves a lot after one more move lower.
If prices move lower, we would leg into a bear put spread reducing cost. I am more bullish in the longer term, so capping the downside on the beans at .80 - $1.00 does not add much risk to the position. This will NOT make the position marginable.
If prices rally higher, we will sell the put we bought to collect back unearned premium. I am never married to a position. The purpose of this trade is to provide protection against a rising dollar pressuring commodities should they announce some tapering of the quantitative easing program. Should they expand the program, you could see further declines in the dollar and commodity prices rise.