James Mound
11-28-2006, 10:47 AM
Corn Synthetic Short Credit Spread
Trade description:
Buy 1 March corn 340 put and simultaneously sell one March corn 360 call and buy one March corn 380 call for a credit of $300. Margin is approximately $400, but can fluctuate to as high as $700 (max risk) depending on price, volatility and time. Options expire February 23rd, 2007.
Explanation:
After a worse than anticipated crop year and spiked demand for corn (ethanol, foreign imports, etc.) the corn market has sustained one of its largest rallies in its history. After rallying more than 50% in just over 2 months, corn comes into a seasonally bearish period prior to new plantings in February. This market is overdue for a price correction and spike in put premiums. This trade design allows for premium collection, defined risk and margin and nearly unlimited profit potential.
http://www.traderslog.com/clip_image006.jpg
***Chart Courtesy of Gecko Software’s TracknTrade.
Profit Scenarios:
Profit is unlimited (in theory it is limited to a market move to 0) and occurs in two places. Profit is $50 per cent below 3.66 to 3.60 ($300 credit received below 3.60 at expiration) and then profit is an additional $50 per cent below 3.40. The recommended exit strategy assuming at least two spreads is to sell half the puts when that quantity equals the same price as covering all the call spreads (for example, if you are in 10 spreads, then pull 5 puts and all 10 call spreads for even money ($0)). This will leave you with free puts and a locked in profit on the trade.
Risk Scenarios:
Max risk is $700 and occurs at expiration with the market above 3.80. Loss is reduced by $50 per cent below 3.80 to 3.66, which is breakeven at expiration.
*Disclaimer: There is risk of loss in all commodities trading. Please consult a James Mound Trading Group Broker before you trade for the first time. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some option strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. James Mound Trading Group, or anyone associated with JMTG or moundreport.com, do not guarantee profits or pre-determined loss points, and are not held monetarily responsible for the trading losses of others (clients or otherwise). Past results are by no means indicative of potential future returns. Information provided are compiled by sources believed to be reliable. JMTG or its principals assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the express written consent of James Mound Trading Group LLC.
Trade description:
Buy 1 March corn 340 put and simultaneously sell one March corn 360 call and buy one March corn 380 call for a credit of $300. Margin is approximately $400, but can fluctuate to as high as $700 (max risk) depending on price, volatility and time. Options expire February 23rd, 2007.
Explanation:
After a worse than anticipated crop year and spiked demand for corn (ethanol, foreign imports, etc.) the corn market has sustained one of its largest rallies in its history. After rallying more than 50% in just over 2 months, corn comes into a seasonally bearish period prior to new plantings in February. This market is overdue for a price correction and spike in put premiums. This trade design allows for premium collection, defined risk and margin and nearly unlimited profit potential.
http://www.traderslog.com/clip_image006.jpg
***Chart Courtesy of Gecko Software’s TracknTrade.
Profit Scenarios:
Profit is unlimited (in theory it is limited to a market move to 0) and occurs in two places. Profit is $50 per cent below 3.66 to 3.60 ($300 credit received below 3.60 at expiration) and then profit is an additional $50 per cent below 3.40. The recommended exit strategy assuming at least two spreads is to sell half the puts when that quantity equals the same price as covering all the call spreads (for example, if you are in 10 spreads, then pull 5 puts and all 10 call spreads for even money ($0)). This will leave you with free puts and a locked in profit on the trade.
Risk Scenarios:
Max risk is $700 and occurs at expiration with the market above 3.80. Loss is reduced by $50 per cent below 3.80 to 3.66, which is breakeven at expiration.
*Disclaimer: There is risk of loss in all commodities trading. Please consult a James Mound Trading Group Broker before you trade for the first time. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some option strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. James Mound Trading Group, or anyone associated with JMTG or moundreport.com, do not guarantee profits or pre-determined loss points, and are not held monetarily responsible for the trading losses of others (clients or otherwise). Past results are by no means indicative of potential future returns. Information provided are compiled by sources believed to be reliable. JMTG or its principals assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the express written consent of James Mound Trading Group LLC.