Question:
You have a clear idea of the upcoming range in a market, but not the direction. What do you do?
A
nswer:
An intrinsic condor call spread
With growing demand and carryout supplies getting smaller, there is little room for a disappointing corn crop this year. Since corn became both a food and energy product about five years ago, its value has risen, providing a floor much higher than in years past. Corn has a floor price of about $4.50; anything lower will spur demand at a very rapid pace.
Weather is the most important factor in the outcome of price because when you have more than 87 million acres planted, a one bushel difference in yield produces 87 million bushels more or less corn supply in the bin.
Here it is Sept. 1 and the market has no idea of how many acres really were planted, were abandoned, and what the yields will be. It all depends on the weather. The market will have more of an idea by mid October, and until then it is really a crap shoot. The final factor will be the chance of an early frost, which would cause yield and quality problems. Just the forecast of such an event will cause the market to rally. In the
corn belt
the average first frost is Oct. 7, but this year with the late planted crops due to excess rainfall, it needs to be a week later.
With a probable floor at $4.50, and if there is not an early frost, prices will be no higher than $6.80 from now until the end of 2008. You can use those prices as a reliable range. Yield estimates from the major research firms, with all the variables this year has presented, have been wildly diverse and it never pays to bet on a weather variable, so how can you profit with these wide ranging expectations? By using a long December corn condor call spread. Basically it buys an intrinsic vertical spread and sells a vertical spread that is out of the money at the same time. This strategy has a known risk and reward potential and gives you the time to be right or exit whenever your thoughts change. You also can morph into another strategy based upon new fundamentals. Here is what you can do: