Despite technological advances, farmers ultimately remain at the mercy of nature. Crops can be severely affected by extreme temperatures, as well as droughts and floods. For active traders in these markets, trading grains can be stressful if any reports come out that turn the market against your position causing you to lose a lot of money.
With binary options you can take a view on commodities with far less collateral than you would need for a traditional futures trade. Traders can use binary options to take a simple view on agricultural commodities, with strictly limited risk.
Binary option contracts are simple yes/no questions that allow the end user to take a position in a particular market because he thinks price is moving in a certain direction, or because he thinks a certain upcoming event will cause the market to move in a certain direction, in a specified timeframe.
You can open positions using Nadex contracts on the underlying CBOT futures for corn and soybeans.
From a demand perspective, the greatest pressure on corn prices is the growing human population. Between 1950 and 2010 the world’s population increased from 2.5 billion to just under 7 billion.
The U.S. produces about 40% of the world’s annual corn yield. Corn is one of the world's most widely produced staple foods. Corn is used in the production of biofuels such as ethanol.
You also can use Nadex’s binary options to trade soybeans—another popular grain market. Soybeans have an increasingly wide range of uses, from food and animal feed to various industrial applications such as cleaning products. Historically, soybeans also have had broad price fluctuations, being sensitive to a variety of factors including changes in climate, consumption trends and supply structure.
The U.S. and Brazil are the world’s leading soybean producers. Soybean meal and vegetable oil account for 85% of production, and 98% of soybean meal is processed into animal feed.
Let’s say you decide to use binaries to trade grains. You read that the USDA forecasts grain production for the next 12 months to be significantly ahead of last year. You believe this positive sentiment will boost the futures price of corn.
In this example the underlying corn futures market is trading around 580. You believe the price of corn is set to rise, following the positive forecast figure.
You choose the following Nadex binary contracts: Corn (Mar) > 583.0 (3 p.m.)
You opt to buy these contracts as you think corn futures will be above 583.0 at 3 p.m.—you select 12 contracts at the offer price of 42.50. Each contract is worth $1 per point.
Your maximum profit and loss are displayed automatically. The most you can make is $690; the most you can lose is $510*.
Based on Nadex's calculated expiration value for the corn future at 3pm, your binary option will settle at:
100 if this value is above 583.0
0 if this value is at or below 583.0
Profit vs. loss
If you make a profit, at 3 p.m., the calculated expiration value for the corn future is above 583.0. Your trade settles at 100. The difference between your opening price (42.50) and the settlement price (100) is 57.50.
Multiply 57.50 by the number of contracts (12) and the contract value per point ($1) to calculate your gross profit.
57.50 x 12 x $1 = $690*
However, your trade may not work out for you. Let’s say that at 3 p.m., the calculated expiration value for the corn future is below 583.0, and your trade settles at 0. The difference between your opening price (42.50) and the settlement price (0) is 42.50.
So, you multiply 42.50 by the number of contracts (12) and the contract value per point ($1) to calculate your gross loss.
42.50 x 12 x $1 = $510*
*Fees apply
Next week we will cover bull spreads and cite a corn bull spread example.