Corn has been the focus of many stories this year not the least of which has been the ethanol story. While we feel the ethanol side of the story is overblown, we do feel that the weather story is under appreciated. All the wild swings in weather, from too wet to too hot etc., should adversely impact the expected yield per acre number. If that number gets revised lower look for price to explode to the upside. Also we typically see prices bottom out near the beginning of harvest and then many times rally through the harvest in bullish years which so far this year has been.
At the same time we see in the Commitment of Traders report that while small traders have gone short large traders have remained long. We have also just completed a classic 1-2-3 bottom formation. So we feel that a long call spread is the best way to play this market through the critical harvest season. It keeps risk defined and relatively low while offering an attractive risk to reward ratio.
click on the chart to enlarge
Buy a December 2007 Corn 370 call while selling a Dec. ’07 Corn 420 call for approximately 10 cents ($500) to open a position.
Or goal is to catch a move above 370 on the Dec. futures contract. Break even point is 380 assuming a 10 cent fill. 100% gross profit would be realized at expiration if the market is at 390. Max profit is realized at expiration if the market is anywhere above 420.
Max risk, before commissions and fees, and assuming the above mentioned fill would be $500. The full premium paid for the spread is lost at expiration if the market expires below 370.
by Derek Frey
Odom & Frey
Call us at 1-866-636-6378