Due to delayed plantings in the major corn states and expected further delays in IA and MO, a position of ownership via options is warranted. A shortage of corn would develop if reduced yields resulted from this delay. Potential risk is a change in weather or collapse in commodities.
Position: Buy December 620 call, sell December 900 call, sell December 550 put at a 7 cent difference. This is approximately $350 plus fees.
Margin: Variable margin is required if futures decline. No margin in an up market. Margin will be a percent of futures decline. Below $5.50, margin is equivalent to futures.
Equity Risk: At expiration – If futures are above $5.50, equity risk is limited to the cost of this option net premium (the original $350 plus fees). Below $5.50, the risk is equivalent to a long futures position. Prior to expiration, the equity risk is equal to the daily change in option value regardless of futures price.
Profit Potential: At expiration - if futures are above $6.20, the profit is equal to the difference between the market and $6.20 with a maximum potential price of $9.00. Prior to expiration, the profit is equal to the difference in the option values. For a ball park estimate – In June, a $1.00 rally to $7.20 might equate to 40 cents or about $2,000. If futures remain at $7.20 into expiration, the profit would be $1.00/bu or $5,000.
Call an Allendale representative today for specific details on this and other ideas.
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