Markets unPACKed: Simple Workarounds on Report Day

Simple Workarounds on Report Day

 

Since our Dec. 8 post, we have purposely been quiet as we await the WASDE report on Dec. 10. Last week we wrote about the 1×2 backspread: For every one Feb 1180 put we sold, we bought two Feb 1140 puts.

At this time, due to technical indicators and fundamental news, we are preparing for a more bearish response to the report. We are a bit more bearish in general due to our analysis on Brazilian moisture levels and yield potentials. We rolled some put strikes up as a result to take advantage of a bearish report, but we do not believe this report will be as bearish as some of our put strikes were placed.

While our position is bearish, we want to be positioned on each side for a swing in either direction. Some ideas to serve this goal were:

  • Choose a reasonably priced put at a strike a little out-of-the-money than January futures (in SF1, futures closed at 1142’6 and CH1 closed at 419’6). This is a bearish protection
  • We had our 1×2 1180-1140 backspread
  • Choose a call option to the upside that is reasonable in premium and out-of-the-money, which is a bullish play

The risk is that the market trades sideways without any range for these options to increase in value, with premium spent and possibly lost.

Reports are a bit of a distraction in trading, especially this month, where the only major action would be if USDA cut production estimates out of Brazil, which we believe is unlikely.

For questions around this trade or other trades, feel free to reach us at [email protected]

 

Disclosure: The risk of loss in trading futures and/or options is substantial. Past performance is not indicative of future results. The information in this message derived from third-party sources is believed to be accurate and reliable; PCC does not guarantee the accuracy or completeness of the information. Opinions expressed in this material are subject to change without notice. This report should not be interpreted as a request to engage in any transaction of futures, options, and/or OTC derivatives. The information contained in this material is not to be relied upon in substitution for the exercise of your independent judgment. Seek independent financial, tax, legal and accounting advice from your own professional advisers, based upon your particular circumstances.

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