Covered calls in September corn
The price of corn has been held down by bearish soybean fundamentals but most analysts agree there is a good chance corn makes its way above $4.00 sooner rather than later. Although it is clear the corn market isn't in any hurry to make a move higher we know that changes in weather could be lurking and that would undoubtedly wake up the slumbering bull. Also, most speculators are heavily short the market. In fact, the COT Report reveals that large speculators are more aggressively short corn futures now as they have been in recent years. At some point, these bears will need to cover positions and get flat with the market (buy). Our friends at Hightower tend to think they will not only offset short holdings but could flip to bullish positions. If this occurs, the short squeeze could be substantial.
Unfortunately, corn put options are too cheap to be a seller but we have found that risk premium built into call options offers covered call traders an attractive setup. Specifically, we like the idea of going long the September corn futures contract near $3.75 and then sell the September 3.80 call option for about 18 cents. The 18 cents of premium collected offers a risk buffer for losses in the futures contract.
This creates a trade that makes money (if held to expiration) as long as the price of corn is above $3.57 (the breakeven point). However, the max profit of about $1,150 will occur if the price of corn is at $3.80 or above. Below the breakeven point of $3.57, it is like being long a futures contract without any protection, thus, the risk is theoretically unlimited.
In short, this trade offers a high probability of success because the risk of loss at expiration occurs only if the price of corn falls to the lowest level seen in recent years. That said, there are never any guarantees and regardless of how high corn might go, the profit potential will never exceed 23 cents or $1,150.
The margin on this trade is roughly $540.
The Zaner360 symbols are: ZCU17 and OZCU7 C3.8
Let us know if you have any questions, or if there is anything we can do for you.
*There is an unlimited risk in covered put selling!
