Option play: Are soybeans really doing this?

July 14, 2014 06:32 AM

Fundamentally, am I really looking at the biggest slump in soybeans in over 40 years? 

The soybeans (CBOT:SNU14) are like a falling knife in terms of the price, and according to a great Bloomberg article yesterday, "Soybean futures capped the longest slump in 41 years after a government reported showed supplies will climb in the U.S., the world's biggest grower."

I am usually a big, big technical guy, but this is some juicy fundamental news. The second paragraph explains the numbers a little, "Stockpiles of soybeans on Aug. 31, 2015, before next year's harvest, will total 415 million bushels, the U.S. Department of Agriculture said today. That's up from 325 million (8.84 million metric tons) forecast in June. World inventories will be a record 85.31 million tons, compared with 82.88 million predicted last month. Traders expected 84.69 million, on average." Whoo-wee, that's some bullish fundamental's.

However, as Ted Seifried VP and Chief Marketing Strategists of Zaner Ag Division explained, "...we are in a weather market, and there is still a lot of weather left". I couldn't agree more in terms of the new crop, but the old crop was what really got smashed yesterday after the monthly USDA supply/demand report and the USDA crop production report. So we'll see how sharp and how deep this knife eventually goes in the soybeans.


Technically, I have added my favorite technical indicators to this chart below. They are the 9- (red line), 20- (green line), and the 50- (blue line) day simple moving averages (SMA). I have also added Bollinger Bands or BB's (the light blue shaded area) and Candlesticks (the red and green bars with the wicks, on this daily chart each bar represents a day of trading). These few technical indicators tell me 8-10 different characteristics about the market at a quick glance so I have them saved on my charts in MARKETHEAD, so they can populate a chart at the click of a mouse.

My favorite technical indicators show me that soybeans are in a "SUPER-TREND" down. The soybeans are in what I have coined a "SUPER-TREND" down that started on June 30 when the 9-day sma (red line) crossed down and under the 20-day sma (green line) as both indicators pointed sharply lower and the market traded below the 9-day sma. It's been like this since then until now.

The momentum down in this market in my opinion is so strong that it has been oversold for a long period of time. So for those of you who are waiting for "the bounce" to go short, good luck to you. I mean according t my technicals we have been oversold for 9 straigt trading days and I mean big time oversold. The reason for this is because we have had a market that has closed on or below the bottom line of the Bollinger Bands (BB's, light blue shaded area) for 9 straight days. My technical view is that the bottom line of the BB's is the support here and the 9-day sma (red line) is the resistance. Well the support is not really holding and the market hasn’t tested the resistance. So as I have said many times imy commentary, markets can remain oversold or overbought for long periods of time.

I figured this out by going back and forth from a daily to a weekly chart by the click of a mouse which I found here, which is a web application that we have developed for our clients called MARKETHEAD where I get about 80-85% of all my research from. That means I get both technical and fundamental research from this web app and I am a veteran series 3 Broker of 15 years. So if I'm using it then maybe my reader's should check it out. Yes? 


Option Play

Some good plays I think could be to buy puts or put spreads with a call for a hedge or "insurance" in case the trend changes to up dramatically. I would recommend this in a 3 to 1 ratio as always. Puts or put spreads give a limited risk and an in the case of outright put options, unlimited profit potential to zero for the price of the underlying future or commodity.

I believe this could be an opportunity, of course not without commensurate risk, to sell deep out of the money call options and collect premium. This is due to the current downward action or maybe the potential for future consolidation.

For exact details on strategies, months, expiration dates, strike prices, and number of positions feel free to contact me at 312-277-0115 or mmckinney@zaner.com.

It is also important to note that I am not married to a market, but to trends. So I make recommendations with options on futures and commodities like the energies, metals, currencies, softs, financials and more.


About the Author

Matt McKinney is a full-service options broker at Zaner Group both buying and selling energies, metals, grains, softs, currencies and the 30-year bond market. My strategies include time frames of 45-120 days with the ability to liquidate at any time. I can be reached at mmckinney@zaner.com.

Whether you're a novice trader who wants to participate in options on futures or an experienced trader, you can also check out my blog at http://www.mmckinneyfutures.com/.