Crude Oil: Prices slumped to a three-month low around President’s Trump’s trade policy with Mexico and the news of a slowdown in the Chinese economy— castings doubts on the outlook for global demand last week. The sudden and volatile price-discovery behaviors in stocks and commodities are clearly illustrating just how much all markets behave erratically to uncertainty. Higher volatility means higher option prices – and as an option seller, this is a good thing. Even before the market closed Friday, I started checking out the PUT option prices for the distant contracts of Crude Oil. It’s hard to imagine a world where Crude drops to $25 or $30 a barrel and yet, here’s what I found:
A DEC19 30-strike Crude Oil PUT that last traded at: 0.14 ($140) 165 days until expiration with a 95% Prob OTM with a $425 initial net margin deposit required (aka: Buying Power Effect.) Not incl. commissions, the potential ROI of (140/425) * 100 = 32.9%
A SEP19 30-strike Crude Oil PUT that last traded at: 0.60 ($60) 73 days until expiration with a 97% Prob OTM with a $350 initial net margin deposit required. Not incl. commissions, the potential ROI of (60/350) * 100 = 17.1%
I did NOT place any new trades yet – as of close Friday.
Just so you know: If you are new to the newsletter, you may not have heard this disclaimer of sort I post when I compute the potential ROI (return on investment) of an option. This is only a potential ROI; I’m saying that if no additional amount of margin is required during the trade, it’s possible. But it isn’t likely. Even though they are only approximate figures, it is still a good way for me get some gauge of the potential of a trade. On either one of the two options in the example above, I would consider half the computed ROI as still a great return. If you are new to this type trading you should be sure you understand how margin requirements are marked-to-the-market each day and vary all the time. When margins increase during a trade this create unrealized losses call a “drawdown.” For this to happen is very common. If you don’t understand this completely, you don’t understand the risks you are taking and you should a conversation with your broker customer service until you do understand. There is no free lunch; the reason we get higher returns is because we are taking higher risks, although they are very calculated risks – they are real.
I want to get back to the Crude Oil market now. Friday’s drop of over $3.00 per barrel is unusual. Such large drops that have little back and fill during the day are usually followed by more down action in the next day’s market. Just as often, things can be overdone as traders who got caught on the wrong-side have cleared their trades (losses.) The media almost certainly will run wild with postulations of gloom and doom and indeed more uncertainty can remain in the markets this week. I feel fortunate to be holding my short SEP19 80-strike crude oil CALLs. I sold them at 0.17 ($170 each) and they last traded at 0.05 ($50.) If I have a chance to close these at near 0.05, I will do so early in trading on Monday. For me, the good is out of them and I want to pocket the money and not leave the unrealized profits at risk (to give back!) Here’s my thinking: If crude opens DOWN, great I get even more profit and I’ll take it immediately. If crude opens UP, that’s great too because I’ll still have a great profit and won’t have it at risk in such an uncertain market. I no longer think of this trade as “a short CALL I sold for $170;” I think of it as a profitable trade that is at risk of losing an unrealized profit. This is no longer the trade I MADE BUT the TRADE I HAVE NOW – and will be treated accordingly.
This week could be a chance to place some good positions with more shorts PUT in crude. I’m not ready to jump into selling the CALLS right now unless I see really high strike OTM CALLs with very high premiums – and you can bet I’ll be watching for those also.
Gold: Internationally, the $US Dollar has been a safe-haven currency and gold has been a place that scared cash goes to in bear stock market times. Almost instantly, when the Mexico tariff news and more weak China talk began Friday, gold goes UP and the $US Dollar DOWN (the normal correlation between the two.) For a while, so long as the ‘saber-rattling’ of rumored interest rate cuts and poor global economy abound, gold should go HIGHER. Gold prices going up is one more sign of uncertainty in the markets. I see this as an opportunity to shop for Gold PUT options and then I plan to -at some point in the coming weeks – sell some CALLs to form short strangles to hold over coming months towards the end of this calendar year.
Corn and Soybeans: I put the corn and soybeans together here for this comment because the high corn prices due to flooding, late-plantings, possible yield drag – seem likely to keep prices volatile in both for a while yet. The very important CROP PROGRESS report from the USDA comes out Monday-TODAY- at 4PM Eastern time. Here’s the link that will take you to the report and report sign-up page: https://usda.library.cornell.edu/concern/publications/8336h188j
USDA Crop Progress Reports
As you might imagine, this report could be the most anticipated report of the week in terms of grain price movement. Growers fill out on line surveys for USDA, the info is compiled over the weekend, and then put in Monday’s report that comes out at 4PM Eastern USA time today. If you haven’t already, you will notice that crop progress numbers zero in on the top 18 states where the crops are; these represent about 92% of the plantings, an ample sample for an accurate survey.
Crop progress report last week showed: Corn at 59% versus the 4-year average of 90% planted. Soybean planting were 29% verus 4-year average of 66%. This late-planting is a major disrupting factor this year; things are not business as usual. The later corn is planted, the less yield (bushels/acre) becomes; this is called “yield drag.” Soybeans do NOT experience as large a yield drag in late planting as corn does.
Some estimates are that Corn could lose 7 to 10 million acres due to late planting and acres going to soybeans. How much, if any of this might be reflected in today’s USDA crop progress is unknown. I posted this link last week, but I’ll put it here again as it has some good insight into these topics. They put up a new Ag Day TV program early each weekday morning: (this Ag Day broadcast audience targeted to farmers https://www.agweb.com/agday/
Of course, I am anxious to SELL some DEC19 Corn CALL options. Before I pull the trigger and sell those CALLs, I have to have a better idea of the crop fundamentals. As I mentioned recently, I won’t be able to pick an exact TOP for the DEC19 corn but I hope to get a better feel than I have now before I sell those CALLs.
One of the ways, we examine possible prices is to look at past history of price versus production. The main report for this is the World Ag Supply and Demand reports, call the WASDE (was-DEE.) The next WASDE due out at noon Eastern USA time on June 11, 2019, on week from today. One important thing realize about USDA reports is that they make every effort to report FACTS, not speculation. After USDA reports facts, the analysts of these markets will be producing various crop scenarios to try and predict what prices might do (this is not the ‘job’ of USDA.) I follow many of the charts and tables from Kansas State University, that are based on USDA reports, and they also provide comments with various outcomes for farmers. Here’s a look at an updated chart form them on Corn Ending Stocks versus historical prices: The GREEN LINE indicates the average “to farm” price for the season.
The vertical brown lines are the STU, stocks-to-use ratios. Think of this number as “what percentage of a years use for corn will be on hand (in stock) as harvest begins in September.” The higher the STU, the more corn stocks we have for the coming year. As you see on the chart (above) the years of about 2010 through 2012 were low enough that corn prices (GREEN line) averaged over $5.50 and up to $7.00 per bushel. Seeing this mark of something around $6.00 a bushel is some indication of what could be in the making this year. If corn makes another huge run-up, the timing will likely be sooner than later. Just a reminder that this is the time of year that peak prices are normally in the market. If you need a short refresher on corn usage and production, here is the link to a video (below) I made last December-2018 that is under 3 minutes that explains some price and seasonal points: You will see that six months ago, the figures were based on a somewhat ‘normal’ season without the late plantings and yield drag we are facing this year.
Comments continued: As I get to this new week and start shopping the Crude PUTs first thing today (Monday), I do realize that selling PUTS with such relatively small premiums (even though they are expensive due to volatility increases), could result in my having to hold them past a “200% rule.” Since the margins to open these trades are so small, I feel I might be able to have a little more tolerance with these PUTS. I am NOT lulled into a sense of safety by believing we won’t see Crude at $30 dollars, still that is way down to almost half of its present price.
Corn and Soybeans will be interesting. Soybeans still have this enormous amount of stocks, have lost market share to China (the #1 soybean customer of the USA), and swine influenza in China has wiped out the hog population equivalent amount of all the hogs in the USA. Still, soybean prices will move up with corn, and if corn acres get switched to soybean acres, the burdensome supplies of beans -will become even higher. Corn will have an increased demand for ethanol production as “E-15” allows domestic USA gasoline to go to year round 15% ethanol up from 10%.
One of the questions I get asked a lot is why don’t I trade more commodity markets. This is as good a time as any to point out that just following four or five markets can get pretty busy. But there are other reasons (IMHO) for NOT trading some of the other markets. Reliable market information is very important. In the past, I’ve traded the Cocoa market and have experienced how unreliable information coming from Ivory Coast and Africa can be; this makes me appreciate the USDA methods and integrity. I used to consult a lot in the orange juice (FCOJ futures) business and also discovered that reliable information from the world’s largest producer of orange juice, Brazil, can be less than reliable, due to crop estimate methods and communications limitations and often having info only from competing sources can be less than dependable. I can’t build a case to NOT trade other markets, it is just that I prefer high liquidity, dependable information, low-cost reliable data with as much transparency as possible. Plus many of the ICE (exchange) commodities often have very low volume options; they do not cater to a larger group of traders, they charge higher fees for everything, and are just not trader friendly. I don’t discourage others from trading other markets, I like the Cotton and Coffee markets; these two have pretty good volume good fundamental information to a point but not as much as others.
I make an effort to tune out as much ‘noise’ as possible – all the news with politics and tariff talk speculation, financial news anchors trying to fill hours of airtime as they desperately try to have something meaningful to say. This type of trading is as much art as science, but I do like the numbers. I can’t believe I woke up this morning and someone is willing to pay me $60 to bet that crude oil will be $25 a barrel by Christmas! I know the perils of over-confidence and hubris (been there, done that) and they are many and real for traders. My grandfather used to say to me, “Life is like a motorcycle. Once you thing you have the hang of it, watch your ass!” Still, so rarely and just once in a while, when I sell such a far OTM expensive option, I get a sample of what it might feel like to own a casino – if even for a split second.
Two of my favorite quotes:
Will Rogers: “Everybody is ignorant, just about different things.”
“If You Can’t Explain it to a Six Year Old, You Don’t Understand it Yourself” – ALBERT EINSTEIN
Have a great week. – Don
The commentary and examples are for teaching purposes only and are not intended to be a trading or trade advisory service. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein on the web site and/or newsletter, are committed at your own risk, financial or otherwise. Trading with leverage could lead to greater loss than your initial deposit. Trade at your own risk. Investors and traders are responsible for their own investment/trading decisions including entries, exits, position, sizing and use of stops or lack thereof. This is not a trade advisory service and is for educational purposes only. The content on the pages here is believed to be reliable - but we cannot guarantee it.
Don A. Singletary is a teacher and writer. For 25 years he was a commodity risk management (hedge) consultant for major corporations. He is the author of Option Income Training Bulletin, the only such publication dedicated to teaching small/medium personal investors how to sell commodity options for a second income, a strategy traditionally used mostly by professional investors, the wealthy, and money managers.
While this website is for subscribers only, you can get full access with a free trial subscription. Also you may visit his blog with many trade examples and articles on this valuable strategy at: SellingCommodityOptions.com
Greetings: June 3, 2019 MONDAY Commentary
Crude Oil:
Prices slumped to a three-month low around President’s Trump’s trade policy with Mexico and the news of a slowdown in the Chinese economy— castings doubts on the outlook for global demand last week. The sudden and volatile price-discovery behaviors in stocks and commodities are clearly illustrating just how much all markets behave erratically to uncertainty. Higher volatility means higher option prices – and as an option seller, this is a good thing. Even before the market closed Friday, I started checking out the PUT option prices for the distant contracts of Crude Oil. It’s hard to imagine a world where Crude drops to $25 or $30 a barrel and yet, here’s what I found:
A DEC19 30-strike Crude Oil PUT that last traded at: 0.14 ($140) 165 days until expiration with a 95% Prob OTM with a $425 initial net margin deposit required (aka: Buying Power Effect.) Not incl. commissions, the potential ROI of (140/425) * 100 = 32.9%
A SEP19 30-strike Crude Oil PUT that last traded at: 0.60 ($60) 73 days until expiration with a 97% Prob OTM with a $350 initial net margin deposit required. Not incl. commissions, the potential ROI of (60/350) * 100 = 17.1%
I did NOT place any new trades yet – as of close Friday.
I want to get back to the Crude Oil market now. Friday’s drop of over $3.00 per barrel is unusual. Such large drops that have little back and fill during the day are usually followed by more down action in the next day’s market. Just as often, things can be overdone as traders who got caught on the wrong-side have cleared their trades (losses.) The media almost certainly will run wild with postulations of gloom and doom and indeed more uncertainty can remain in the markets this week. I feel fortunate to be holding my short SEP19 80-strike crude oil CALLs. I sold them at 0.17 ($170 each) and they last traded at 0.05 ($50.) If I have a chance to close these at near 0.05, I will do so early in trading on Monday. For me, the good is out of them and I want to pocket the money and not leave the unrealized profits at risk (to give back!) Here’s my thinking: If crude opens DOWN, great I get even more profit and I’ll take it immediately. If crude opens UP, that’s great too because I’ll still have a great profit and won’t have it at risk in such an uncertain market. I no longer think of this trade as “a short CALL I sold for $170;” I think of it as a profitable trade that is at risk of losing an unrealized profit. This is no longer the trade I MADE BUT the TRADE I HAVE NOW – and will be treated accordingly.
This week could be a chance to place some good positions with more shorts PUT in crude. I’m not ready to jump into selling the CALLS right now unless I see really high strike OTM CALLs with very high premiums – and you can bet I’ll be watching for those also.
Gold: Internationally, the $US Dollar has been a safe-haven currency and gold has been a place that scared cash goes to in bear stock market times. Almost instantly, when the Mexico tariff news and more weak China talk began Friday, gold goes UP and the $US Dollar DOWN (the normal correlation between the two.) For a while, so long as the ‘saber-rattling’ of rumored interest rate cuts and poor global economy abound, gold should go HIGHER. Gold prices going up is one more sign of uncertainty in the markets. I see this as an opportunity to shop for Gold PUT options and then I plan to -at some point in the coming weeks – sell some CALLs to form short strangles to hold over coming months towards the end of this calendar year.
Corn and Soybeans: I put the corn and soybeans together here for this comment because the high corn prices due to flooding, late-plantings, possible yield drag – seem likely to keep prices volatile in both for a while yet. The very important CROP PROGRESS report from the USDA comes out Monday-TODAY- at 4PM Eastern time. Here’s the link that will take you to the report and report sign-up page: https://usda.library.cornell.edu/concern/publications/8336h188j
USDA Crop Progress Reports
As you might imagine, this report could be the most anticipated report of the week in terms of grain price movement. Growers fill out on line surveys for USDA, the info is compiled over the weekend, and then put in Monday’s report that comes out at 4PM Eastern USA time today. If you haven’t already, you will notice that crop progress numbers zero in on the top 18 states where the crops are; these represent about 92% of the plantings, an ample sample for an accurate survey.
Crop progress report last week showed: Corn at 59% versus the 4-year average of 90% planted. Soybean planting were 29% verus 4-year average of 66%. This late-planting is a major disrupting factor this year; things are not business as usual. The later corn is planted, the less yield (bushels/acre) becomes; this is called “yield drag.” Soybeans do NOT experience as large a yield drag in late planting as corn does.
Some estimates are that Corn could lose 7 to 10 million acres due to late planting and acres going to soybeans. How much, if any of this might be reflected in today’s USDA crop progress is unknown. I posted this link last week, but I’ll put it here again as it has some good insight into these topics. They put up a new Ag Day TV program early each weekday morning: (this Ag Day broadcast audience targeted to farmers https://www.agweb.com/agday/
Of course, I am anxious to SELL some DEC19 Corn CALL options. Before I pull the trigger and sell those CALLs, I have to have a better idea of the crop fundamentals. As I mentioned recently, I won’t be able to pick an exact TOP for the DEC19 corn but I hope to get a better feel than I have now before I sell those CALLs.
One of the ways, we examine possible prices is to look at past history of price versus production. The main report for this is the World Ag Supply and Demand reports, call the WASDE (was-DEE.) The next WASDE due out at noon Eastern USA time on June 11, 2019, on week from today. One important thing realize about USDA reports is that they make every effort to report FACTS, not speculation. After USDA reports facts, the analysts of these markets will be producing various crop scenarios to try and predict what prices might do (this is not the ‘job’ of USDA.) I follow many of the charts and tables from Kansas State University, that are based on USDA reports, and they also provide comments with various outcomes for farmers. Here’s a look at an updated chart form them on Corn Ending Stocks versus historical prices: The GREEN LINE indicates the average “to farm” price for the season.
The vertical brown lines are the STU, stocks-to-use ratios. Think of this number as “what percentage of a years use for corn will be on hand (in stock) as harvest begins in September.” The higher the STU, the more corn stocks we have for the coming year. As you see on the chart (above) the years of about 2010 through 2012 were low enough that corn prices (GREEN line) averaged over $5.50 and up to $7.00 per bushel. Seeing this mark of something around $6.00 a bushel is some indication of what could be in the making this year. If corn makes another huge run-up, the timing will likely be sooner than later. Just a reminder that this is the time of year that peak prices are normally in the market. If you need a short refresher on corn usage and production, here is the link to a video (below) I made last December-2018 that is under 3 minutes that explains some price and seasonal points: You will see that six months ago, the figures were based on a somewhat ‘normal’ season without the late plantings and yield drag we are facing this year.
Comments continued: As I get to this new week and start shopping the Crude PUTs first thing today (Monday), I do realize that selling PUTS with such relatively small premiums (even though they are expensive due to volatility increases), could result in my having to hold them past a “200% rule.” Since the margins to open these trades are so small, I feel I might be able to have a little more tolerance with these PUTS. I am NOT lulled into a sense of safety by believing we won’t see Crude at $30 dollars, still that is way down to almost half of its present price.
Corn and Soybeans will be interesting. Soybeans still have this enormous amount of stocks, have lost market share to China (the #1 soybean customer of the USA), and swine influenza in China has wiped out the hog population equivalent amount of all the hogs in the USA. Still, soybean prices will move up with corn, and if corn acres get switched to soybean acres, the burdensome supplies of beans -will become even higher. Corn will have an increased demand for ethanol production as “E-15” allows domestic USA gasoline to go to year round 15% ethanol up from 10%.
One of the questions I get asked a lot is why don’t I trade more commodity markets. This is as good a time as any to point out that just following four or five markets can get pretty busy. But there are other reasons (IMHO) for NOT trading some of the other markets. Reliable market information is very important. In the past, I’ve traded the Cocoa market and have experienced how unreliable information coming from Ivory Coast and Africa can be; this makes me appreciate the USDA methods and integrity. I used to consult a lot in the orange juice (FCOJ futures) business and also discovered that reliable information from the world’s largest producer of orange juice, Brazil, can be less than reliable, due to crop estimate methods and communications limitations and often having info only from competing sources can be less than dependable. I can’t build a case to NOT trade other markets, it is just that I prefer high liquidity, dependable information, low-cost reliable data with as much transparency as possible. Plus many of the ICE (exchange) commodities often have very low volume options; they do not cater to a larger group of traders, they charge higher fees for everything, and are just not trader friendly. I don’t discourage others from trading other markets, I like the Cotton and Coffee markets; these two have pretty good volume good fundamental information to a point but not as much as others.
I make an effort to tune out as much ‘noise’ as possible – all the news with politics and tariff talk speculation, financial news anchors trying to fill hours of airtime as they desperately try to have something meaningful to say. This type of trading is as much art as science, but I do like the numbers. I can’t believe I woke up this morning and someone is willing to pay me $60 to bet that crude oil will be $25 a barrel by Christmas! I know the perils of over-confidence and hubris (been there, done that) and they are many and real for traders. My grandfather used to say to me, “Life is like a motorcycle. Once you thing you have the hang of it, watch your ass!” Still, so rarely and just once in a while, when I sell such a far OTM expensive option, I get a sample of what it might feel like to own a casino – if even for a split second.
Two of my favorite quotes:
Will Rogers: “Everybody is ignorant, just about different things.”
“If You Can’t Explain it to a Six Year Old, You Don’t Understand it Yourself” – ALBERT EINSTEIN
Have a great week. – Don
The commentary and examples are for teaching purposes only and are not intended to be a trading or trade advisory service. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein on the web site and/or newsletter, are committed at your own risk, financial or otherwise. Trading with leverage could lead to greater loss than your initial deposit. Trade at your own risk. Investors and traders are responsible for their own investment/trading decisions including entries, exits, position, sizing and use of stops or lack thereof. This is not a trade advisory service and is for educational purposes only. The content on the pages here is believed to be reliable - but we cannot guarantee it.