Oats are typically the leading indicator for the rest of the grain complex and we are simply suggesting the purchase of these slightly out of the money puts that are very cheap. Grains have been rallying for some time now since the harvest moon, and we are seeing signs of exhaustion in grains at this time. Oats in particular have recently pulled back off of significant trend line resistance on the Monthly charts. This resistance has proven to be a multi-year high in the past and is very likely to hold this market back from further rallies in the near term.
Oats are ignored by most traders which is why these options are so cheap. This is a great trade especially if you are already long the other grains like wheat, corn, or soy. This trade could realistically return about 300% if we simply pull back to 2.00 in Oats. Market usually fall three times faster than they rose and these grain markets have come up quite quickly so the turn around when it comes is expected to be an all out plunge.
click on the chart to enlarge
Buy one December 2006 Oats 220 put for 5 cents $250 or less to open a position.
Max profit, assuming a 5 cent fill, is 215 cents ($10,750) and occurs with December 2006 Oats expiring at zero. This is of course not possible and not at all our real target I am simply being mathematically correct. Our real target for this trade is a move back to 2.00 over then next 30 days or so, which would result in a profit of $750 per $250 invested giving us a 3 to 1 return on our money.
Max risk, before commissions and fees, and assuming a 5 cent fill, is $250.00. This occurs at expiration with Oats trading above 220.00.
Odom & Frey
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