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mspencerfarms
Contributor

Marketing consultants, what a joke!

Corn strategy of the day, I heard on the radio.  Sell N/C corn today and then spend 60 cents on a Sept. $7 call option to leave the upside open.  Ok, now let's try to put this in perspective.  My  local cash cont. bid today is $5.58 for fall delivery.  I spend .58 on a $7call so now I have my corn sold at $5.00.  The Sept. futures are at $6.58 so to get to my $7 strike price corn has to go up 42 cents.  42 cnts. out of the money and the 58 cnts. for the cost of the call option means that corn would have to go up $1.00 a bushel just to make 1 penny. 

 

So todays cash bid is $6.80 locally.  That is $1.80 better than the above strategy.  Plus we know going into  this strategy that options expire worthless 90% of the time.  Wow!  Is anyone willing to try this one?

 

 

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4 Replies
hardnox604008
Advisor

Re: Marketing consultants, what a joke!

I do think that in the case of a genralized "risk" collapse ala' '08, NC corn futures could go to $4.

 

If you want to be that the powers that be won't let that happen you've got some history on your side- they are certainly throwing everything but the kitchen sink at the system to keep it going.

 

But I'll return to my fundamental beleif that markets set you up for the big one- after giving everyone who has done any active marketing over the last 3 years a severe regret hangover, someday it will hammer the complacent.

 

fwiw, h

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GoredHusker
Senior Contributor

Re: Marketing consultants, what a joke!

Local basis was $1.20 under on wheat at harvest.  Within a month, it was $1.80 under.  By holding, you just lost 60 cents in basis.  This difference would have paid for a call option.  Really, this strategy isn't a lot different than protecting unsold bushels by buying a put option.  An at-the-money put option for Dec. corn costs roughly 75 cents taking the $6.00 strike down to $5.25 protected futures price.  Local basis is 70 cents under the Dec. which then takes the cash price down to $4.55 cash being protected from a $6.00 strike.  At the end of the day, everyone has to pick their poison.  They can either be long the corn market by doing nothing, hedging using futures, cash sales, cash sales with a call option on top, puts, etc. 

 

Knowing that options expire worthless a majority of the time, one should take advantage of this.  I'd lean towards selling the $7.00 call and using the premium to buy the at-the-money-put.  If the call on top is exercised, great you get to sell $7.00+ corn.  If it goes down, the premium for the sold call pays for a majority of the put purchased.  The reasons a lot of marketing consultants advise buying calls once cash grain is sold is because they get sick and tired of clients whining and complaining when they don't hit the exact top.  There once was a large marketing consulting group that used to have clients hedge corn and then buy an at-the-money call.  I never did understand this strategy other than they were trying to get more in commissions because typically an at-the-money call costs roughly the same as an at-the-money put.  Why put two positions on the same bushel of grain when the same could be accomplished by just buying the put? 

 

Marketing is very easy if you always look through the rearview window. 

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Artifice
Senior Contributor

Re: Marketing consultants, what a joke!

lets hope everyone knows, there is no FREE advantage in any option or other market.

trade offs.

if someone weasnt themselves set up for XYZ scenario, options can do it for you.

 

but largely, keeing it simple   is better, take 680, unkless you think C is going to 10 this summer.

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ag678
Veteran Contributor

Re: Marketing consultants, what a joke!

If you had 200 bu corn it would take $116 per acre to do this.  If I do my math right you could lock in $5.10 futures with 85% crop insurance for more then half the price and you get to insure production for free.  I am a little confused with your example of cash corn vs Sep futures vs new crop.  You probably can't compare $6.80 cash with a new crop strategy they are a whole different animal.  If the guy on the radio was trying to get you to sell old crop corn for new crop delivery he should just quit today, but I doubt he would be that stupid so I am assuming he was talking about  pricing new crop.  Although I would agree Sep to Dec inverse could get better and you have to buy less time value with Sep options there is some spread risk to be considered when not hedging in the correct month and if you don't know what the spread risk is probably should put on Dec options

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