Corn has been one of the best performing grain markets in 2006 and now 2007 has started with a bang. After last weeks bullish crop report we are seeing corn trade above $4.00 per bushel for the first time since 1996. Much of the new demand is coming from ethanol, but harsh weather conditions are also a factor. Back in 1995-1996 when corn last traded above $4.00 it quickly rallied to just above $5.00 before turning back down. That is what we are expecting again with this trade. A move back to resistance at $5.00.
The trend remains up as we continue to hit new highs almost daily. This trade was actually brought to my attention by a client, thank you Jude! This trade fits the parameters we look for with a near the money call being bought with plenty of time for the expected move to materialize and and giving us 4 to 1 on our money.
Buy one May 2007 Corn 430 call and buy one May 2007 Corn 540 call and at the same time sell one May 2007 Corn 480 call and sell one May 2007 corn 500 call, for a combined cost and risk of 10 cents ($500) or less to open a position.
Max profit, assuming a 10 cent fill, is 40 cents ($2000) and occurs with Corn trading between 480 and 500 at expiration. Break even points are $440 and $530 which means we have a band of 90 cents in which the trade can be profitable.
Max risk, before commissions and fees, and assuming a 10 cent fill, is $500. This occurs at expiration with Corn trading below 430 or above 540.
Odom & Frey
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