The recent State of the Union address was interesting to say the least. One of the major themes to come out of it was the Presidents desire to become more energy efficient. If this idea gets some traction then we will likely see three markets in particular benefit the most from this move away from fossil fuels. Those three markets are corn, sugar, and soybeans. Corn has already seen a very substantial rally based on this very idea. Sugar has been slow to react and at this point is a buy. Both of these markets are benefiting from increased demand for ethanol. The soybean market on the other hand can be used to make bio-diesel. Bio-diesel is another alternative fuel that has not been as widely reported on as ethanol.
If we are going to become more energy efficient then bio-diesel is sure to play a role. With that in mind we are advising clients to get into long soybean positions. This trade gives us a solid risk to reward ratio while buying an at-the-money(ATM) call and selling a way out of the money call to reduce the cost and risk of buying the ATM call. By using the May contract we are giving this trade ample time for this story to play itself out.
click on the chart to enlarge
Buy one May 2007 Soybean 740 call and at the same time sell one May 2007 Soybean 800 call, for a combined cost and risk of 15 cents ($750) or less to open a position.
Max profit, assuming a 15 cent t fill, is 45 cents ($2250) and occurs with Soybeans trading at $8.00 at expiration. Break even point is $7.55.
Max risk, before commissions and fees, and assuming a 15 cents fill, is $750. This occurs at expiration with Soybeans trading below $7.40.
Odom & Frey
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