Posted on Jan 10, 2024, 09:42 by Dave Toth

In Mon’s Technical Webcast we discussed the technical elements on which a major bearish count remains predicated.  We don’t need to rehash these elements again here, so suffice and summarize it here to say that a recovery above 03-Jan’s 12.80 smaller-degree corrective high and short-term bear risk parameter remains minimally required to even defer, let alone threaten a continued bearish count and policy.  Commensurately larger-degree strength above 28-Dec’s 13.28 larger-degree corrective high and key long-term bear risk parameter remains required to negate this count pertinent to longer-term commercial players.  Until/unless strength above these levels is proven, the trend remains down on all practical scales and should not surprise by its continuance or acceleration straight away.

This said, we have it on excellent fundamental authority at RJO that this Fri’s key crop report can certainly be an impactful one, prompting a BIG move in either direction.  A sharp acceleration of the major downtrend would/should surprise few.  If there’s going to be a surprise, it’ll most likely be to the upside.  We believe this creates a need to protect against a MOVE AWAY FROM current 12.40-area prices while limiting hedge risk/cost to a fixed, acceptable level AND providing unlimited hedge protection.  With these requirements in mind, we structure bull and bear strategies for end-users and producers below.

PRODUCER BEAR HEDGE:  FEB 12.40 / 12.20 PUT BACK SPREAD

This strategy involves selling 1-unit of the Feb 12.40 at-the-money Puts around 19-cents and buying 2-units of the Feb 12.20 Puts around 11-cents for a net initial cost of 3-cents.  This strategy provides:

• a current net delta of -17%
• fixed and maximum cost/risk of 3-cents on ANY reversal/rally surprise above 12.40 
• fixed, maximum cost/risk of 23-cents if the underlying Mar contract settles at 12.20 16 days from now at expiration on 26-Jan
• virtually unlimited, dollar-for-dollar downside hedge protection below its 11.97 breakeven point at expiration.

Only a glance at the P&L graph below is needed to see how/why this strategy is structured for either a continuation of the major downtrend OR a “surprise” reversal higher as a result of Fri’s crop report.  If the report proves to be a total dud resulting in flatlining price action, by mid-to-late next week hedgers may want to consider covering this strategy for what should be a relatively small loss and replace it with a new hedge strategy per post-report technical conditions and new resulting strike levels.

END-USER BULL HEDGE:  FEB 12.40 / 12.60 CALL BACK SPREAD

This strategy has the same risk/reward metrics and rationale as that detailed above for producers, only to the bull side for end-users.  This call back spread strategy involves selling 1-unit of the Feb 12.40 at-the-money Calls for around 18-3/4-cents and buying 2-units of the Feb 12.60 Calls around 10-3/4-cents for a net initial cost of about 2-3/4-cents.  This strategy provides:

• a current net delta of +18%
• negligible and fixed, maximum risk/cost of 2-3/4-cents on ANY continuation of the secular bear trend below 12.40
• fixed, maximum risk/cost of 23-cents if the underlying Mar contract settles at 12.60 at expiration 16 days from now on 26-Jan
• unlimited, dollar-for-dollar upside hedge protection above its 12.83 breakeven point at expiration.

Here, too, the structure of this strategy is based on a MOVE AWAY FROM current levels, either in the continuation of the major bear trend OR a surprise reversal higher as a result of Fri’s crop report.  If Fri’s report proves to be a non-event, end-users may want to cover this strategy by mid-to-late next week to avoid the risk of a maximum risk/cost of 23-cents.

Please contact your RJO representative for an updated bid/offer quote on either of these strategies and good luck on Fri’s numbers.