The Bull Market Is On, In Soybeans. Commodities Exposure Trading Limited Risk Options Strategies

Not only did stocks rally again on Monday, making new highs, but Soybean Futures gained almost 3% with the November contracts closing above $10 for the first time since July 29th. For the year the September E-mini S&P Contract has rallied 7.5% while November Soybeans have rallied 12.5%. Although Soybeans traded a high of 11.86 in June there was a sizable sell-off that followed and took November Soybeans down to a low of $9.43. This volatility is significant and provides speculators an opportunity to participate in a market that has significant upside potential.

The September Contract for Soybeans has been closing at a premium to the November contract which may be an indication of an expected shortage. Other grain contracts, like Corn and Wheat trade in a typical carrying charge market. This means that the price of the front month contract is less expensive than the second and farther out contracts. This would typically signify that there is not a shortage or a concern of a shortage. In the case of Soybeans, however, the front month contract is the most expensive contract on the board. Therefore, there may be the perception of a shortage. The Chart below gives a view of the November Soybeans contract since March.


I am no expert on Grains however the Soybean market provides an interesting environment for one who may be interested in getting long a commodity and doing it through a limited risk options position. The strategy set forth below is a long strategy for November Soybeans. It is designed to take advantage of the implied volatility skew which has a slight advantage and enables you to risk, if you were to trade in the middle of the bid/ask spreads, $928 to make $1072. It involves buying a call spread and selling a put spread to create a long position. The idea is to create a long speculative strategy with good value.


The Table above provides all of the details of the trade. As you can see if you were to get long Soybeans by buying the 1040 Call and Selling the 980 Put, which are almost equidistant from the current trading price near the end of Monday’s trading, you would have to pay for the trade. While you would have greater upside potential, you would also have unlimited risk to the downside. While I am always looking to devise options trading strategies with a significant implied volatility skew advantage, this simply does not exist in the current trading environment in Soybeans. If however, you want to get long Soybeans with a bit of an edge and participate with a defined risk and reward, this is the type of strategy you should be looking at in any options contract. Each market has a different skew so it is essential that you evaluate the implied volatility skew before trading. If you have any questions: Contact Us.

Whether it is stocks or futures, options speculating or hedging, options trading provide the opportunity to be creative and potentially find good value to meet your risk reward requirements. Our Options Guide provides information about trading strategies that should be reviewed. The example for Soybeans is ideal for one who is interested in trading from the long side only. The transaction would not be recommended in reverse if you wanted to get short. Options trading provide leverage and versatility not provided by just trading the underlying. Be sure to understand the rules of trading before putting risk capital to work.

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

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