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!