From the August 01, 2011 issue of Futures Magazine • Subscribe!

USDA Report Rewards Call Sellers in Corn — Time to Sell Puts Approaching

The U.S. Department of Agriculture (USDA) shook up the corn market as the quarterly stocks report for the second quarter 2001 showed more corn in storage than even the bears expected.

The June 30 report showed the United States had 3.67 billion bushels in storage — substantially higher than the average estimate of 3.32 billion bushels.

Adding to the bearish tone was projected US planted acreage for 2011 at 92.3 million acres — well above early June estimates of only 90.7 acres. U.S. farmers ended up planting more corn in 2011.

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The market had been concerned about planting delays in corn and worried that corn acreage would be shifted to soybeans that can be planted later in the year.

But as Liberty Trading stated in its last corn update on May 27, "There certainly still is potential for some corn acreage to he shifted into soybeans. But these should be in isolated areas and not involve a significant amount of acreage. …we now are advising clients to begin initiating call sales as premiums are now at inflated levels."

The current and projected supply will now have to be adjusted in the next USDA supply/demand report. In the meantime, corn traders are pricing the heavier supply into the market. That means that the sell off that began on July 1 likely will continue before stabilizing at a certain price level in coming sessions.

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We feel it likely that the market could overshoot the downside. This may be apparent as corn is currently about 40¢ above its July 1 low. The growing season is not nearly over for corn, that leaves plenty of room for summer weather issues. More importantly is the market's tendency to price in "best case" or "worst case" scenarios — especially after a dramatic report. With ideal growing weather in the Midwest (notwithstanding some flooding in a few areas), and now bearish stocks and planting reports, corn likely will price in a "best" case scenario, it may already have. This means lower prices in the short term. Yet, the odds of those figures being amended in upcoming August and/or September reports is high. Falling prices will likely bring importers off the sidelines, once again drawing on supply. Remember last year when drought in Europe started a rally that gained momentum when what was thought to be an ideal growing season in the United States turned out not to be so ideal.

The sharp reversal in early July was evidence of such a correction after the market adjusted to June's report. However, look for additional pullbacks in July and early August as opportunities for going put shopping in the corn market (that is, looking for high premiums for which to sell). Currently, a $5 put on March 2012 corn has a premium of $450-$500. As long as prices stay above $5, your put will expire worthless and you pocket the premium. Sellers who sold calls in June can either take profits or look to turn the trade into a strangle with the new puts.

James Cordier is the founder of investment firm Liberty Trading Group/OptionSellers.com. Michael Gross is an analyst with Liberty Trading Group. They wrote "The Complete Guide to Option Selling," 2nd Edition (McGraw-Hill 2009). Visit them at www.OptionSellers.com

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