COVERED CALLS IN MARCH SUGAR, WITH INSURANCE
The sugar market has not be spared from the recent commodity downturn on news of fresh tariffs between China and the US. However, we think the market might have overcompensated for the risk and in the overall scheme of things sugar is historically cheap. Further, there is a seasonal buy issued by MRCI that suggests the March sugar futures tends to go up in late March and early July. In fact, buying on or about June 14th and offsetting near July 8th has been successful in 14 of the last 15 years.
We like the idea of playing the upside using covered calls in March sugar, but with the purchase of catastrophic insurance using a September put option. This gives the trade plenty of time to work with capped risk (at least through the first few months of the trade). Specifically, we like buying March sugar near 13.00, then selling the March 13.00 call option, then purchasing a September 11.00 put (the September puts trade against the October sugar futures, which is trading much lower than the March futures so this insurance will come into play if sugar drops about 1.30).
The maximum profit is roughly $907 before commissions and fees. The risk cannot be accurately calculated because of the difference in expiration dates on the primary legs of the trade vs. the insurance. However, we believe the insurance should keep risk somewhere in the $800 to $1000 if something goes horribly wrong while the insurance is still in play.
If held to expiration, the trade achieves the maximum profit if sugar is at 13.00 (the current price) or higher. In short, we simply need sugar to trade sideways or higher to reach the max profit.
The margin on this trade: $364
The delta on this trade is: .33
The Zaner360 symbols are: SB-MH9, OSB-MH9 C0.13, and OSB-MU8 P0.11
Let us know if you would like us to take this action in your account.
*There is an unlimited risk in naked option selling and futures!
