The Grain complex has been on a very good run for many months now. However, with all the pressure we are seeing on foreign markets, Asia in particular, there is an ever increasing possibility of a slow down in the dramatic growth they have seen in recent years. If growth in Asia slows, then many commodities could see a pullback as well. Oats tend be lead the rest of the grain complex and they have already seen a pull back off of recent multi-year highs. Looking at the long term monthly chart below you can clearly see that it looks like we have formed a spike.
Each time the market has formed a spike like this in the past, it has then corrected significantly. This is simply a cheap long term trade that positions you short for very little risk. Using past pull backs as a guide one can reasonably expect a 40 – 80 cent pull back or even more given how much we have rallied and the time we have until expiration.
click the chart to enlarge
Buy July 2007 Oats 240 puts for 7 cents ($350) or less to open a position.
Or profit goal would be a move back below 2.00. If we meet that objective the profit will be 33 cents ($1650) on our $350 risk giving you almost 5:1 on your money. Our break even point assuming a 7 cent fill is 2.33 so any move below that would result in a profit.
Max risk, before commissions and fees, and assuming a 7 cent fill, is $350. This occurs at expiration with Oats trading above 240.
Odom & Frey
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