Using Options to Trade the USDA Report

by Archer Financial Services | Aug 08, 2017
By Matthew Krupski
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Hedgers and speculators are awaiting Thursday’s USDA report to gain a better picture of this year’s corn and soybean crops.  Traditionally, the August report is the first of a few that give us a more informed idea of possible yields as we approach fall harvest.  Hedgers and speculators have several choices in the options markets to gain their desired exposure or protection prior to the report.

The most pure play is to simply buy options on new crop futures.  Options on December Corn offer coverage through option expiration on November 24th, and options on November Soybeans provide coverage through October 27th.  These options expire into their respective new-crop futures, so traders do not have to worry about futures basis risk.  These options have the added benefit of providing coverage through subsequent reports and virtually all of harvest. However, the more time you have to expiration, the more       expensive options are.  If you choose to purchase these options you will be faced with a more expensive up-front cost.  Alternatively, if you choose to offset the options after the report they should still have plenty of time value remaining. 

Another choice traders have is short-dated new crop options.  The September short-dated new crop options expire on August 28th.  Like the options above, these options expire into their respective new-crop futures so traders do not have to concern themselves with the futures basis.  Unlike the options above however, these options expire relatively soon, so they should be significantly less expensive than November or December options.  While that means less upfront cost, traders electing to purchase these options will lose the benefit of coverage through harvest and subsequent USDA reports.

Finally, the most inexpensive options will be August Week 2 weekly options.  These options expire on Friday, August 11th, the day following the report.  With only four days of time-value remaining, these options will be the most inexpensive and therefore provide the greatest leverage if traders are expecting a large move on the day of the report.  These options expire into the nearest future, however, so they introduce futures basis risk into your trade or hedge.  Additionally, traders choosing to purchase these options will risk missing out on moves on a delayed response in the market because of their proximity to expiration. 

The availability of differently dated options allows for a wide variety of hedging and speculating strategies going into the report.  Traders can use a combination of long and short options to alter the costs required and gain virtually any exposure they need.  However, remember that trading options and futures is a risky endeavor and traders and hedgers should always speak to a qualified professional to determine the ultimate risks and suitability for their situation prior to trading.  

For more information about this article, please contact me at 312.242.7978 or via email at matthew.krupski@archerfinancials.com.  I look forward to hearing from you. Thank you.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The risk of loss in trading futures and options can be substantial. Past results are not indicative of future results or performance. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. Research analyst does not currently maintain positions in the commodities specified within this report. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.