While this years crop is big, demand remains quite high. Also the surge in demand for corn that is converted into ethanol is also a point that should not be ignored. Even if Crude Oil prices fall by $10 or more per barrel (which I doubt) demand for ethanol and other alternatives should continue to climb. This trade is structured so that you can be long corn with unlimited upside potential while at the same time keeping downside risk to a minimum.
Buy one July 2006 Corn 270 call, and buy one July 2006 Corn 250 put, while selling a July 2006 Corn 260 put for a combined cost of 4 cents ($200) or less to open a position.
Judging by the response we got on the last grain trade, I can only assume that many of you remain unconvinced of the coming rally in grains. Last week we saw the beginning of the move that I talked about in last weeks soybean trade. The overall outlook for corn remains strong.
At expiration, assuming a 4 cent fill, the break even point is 274. Each cent above 274 is $50 profit, so at 300 we would have 26 cents in profit or $1300.
Max risk assuming a 4 cent fill is ($700)(4 cents plus the difference between the put that was bought and the put that was sold which was 10 cents=14 cents or $700). This occurs at expiration with corn trading below 250.
Contact Odom & Frey Futures and Options for more details.
By Matt Odom