Markets unPACKed: Too Soon to Talk About the Weather?

Markets unPACKed: Too Soon to Talk About the Weather?


As the Sunday, June 6 evening session opened for trading, weather markets were starting to ‘heat up’…pun intended.

Last week, the American weather model softened the markets on Thursday as rain came into the forecast. Of course, the European model countered that forecast and demonstrated much drier conditions hitting the Midwest, leaving Friday to have rallying prices.

Our focus on Friday was to see how the Sunday night trading session would prevail. Our prediction was that very little would change with weather and weather forecasts, but still manage to rally prices. Essentially, the Sunday extended forecast started to look more like last week’s European model and we saw July futures in corn rally 20 cents and July soybean futures rally 30 cents. It seems that the NOAA drought monitor looks inconsequential for states like Iowa, Missouri, parts of Nebraska, and part of Illinois.


Is it too early to start trading this market around weather when maybe we really just want to maintain these prices through the summer? Or is this early concern for drought conditions a reasonable implication for worsening weather?

As risk managers, we are positioning ourselves with call spreads and cheap out-of-the-money puts. Now that sounds simple, and we are more bullish than bearish at this time, but we see spending 2-3 cents on puts worth the hedge should this weather market fall apart.

In terms of our options strategies, we were looking at September corn this morning as some interesting entry and exit points. In September corn the contract high was 656 one month ago, with today’s high of 632. Our technical indicators last night suggested the next point of resistance would be around 632, and that indication proved correct as we came off the high to close at 619.

Beans showed the best price action last night as September beans made a new contract high of 1510 but we saw 1467-1477 as the possible level of support if beans sold off on Monday. September beans closed right at 1467 and will be watching for Monday night overnights to see if this support can stick.

The issue with vanilla options is picking the strike. A 680 call sounds interesting but buying vanilla calls relies on a single price at a point in time. What we have been talking to some commercial hedgers about are Average Price Calls. To quickly jog your memory, this is an Asian option. Rather than the payoff being dependent on the specific price of the underlying futures contract, this payoff depends on the average price of the underlying asset over a certain period.

So, if you buy a 680 corn call and the market rallies to 900, the average between those two values is 790; 790 minus 680 minus premium paid is your payoff. This trade smooths out volatility and you are not dependent on that 680 strike being your point of payoff. Asian options are typically available with an OTC provider as they are exotic, but if one is wanting upside participation with an averaging component, this may be an interesting trade to research.


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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; Coquest 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.