Bean Bulls Take a Breather
Today's Idea
Traders concerned about the potential volatility in price swings after the USDA crop production report is released have a tendency to bid-up option premiums days before the report is released. This tendency can make short option strategies "attractive" to more aggressive traders who hope to benefit from a decrease in option volatility once the figures are out. One such trading strategy would be to sell out-of-the-money strangles in Soybean futures options. For example, with March Soybeans trading at 1363.50 as of this writing, the February Soybean 1500 calls and the February Soybean 1250 puts could be sold for about 10 cents, or $500 per strangle, not including commission. The premium received would be the maximum potential gain on the trade and would be realized at expiration should March Soybeans be trading above 1250.00 and below 1500.00 at option expiration about 2 weeks away. Given the potential risk on selling naked options, traders should have an exit strategy in place should the trade move against them. One such strategy would be to buy back the options sold should the strangle trade at more than three times the premium received for selling the strangle originally.
Fundamentals
Like many commodity markets at the start of the New Year, Soybean prices have slumped a bit, as commodity index fund re-balancing and signs of improving weather conditions in Argentina have traders lightening up on their long positions. Long-only commodity index funds are expected to be net-sellers in Soybeans to start the year, as strong price gains in 2010 have these funds "overweighed" in the grain complex. In addition, some weather forecasts are now calling for the potential for increased rainfall in the parched Soybean growing areas of Argentina, the world's third largest Soybean exporter. However, not all the news for Soybeans is bearish, as Chinese Soybean demand is still robust, which is keeping U.S. Soybean exports well above the USDA estimate. Also, any rainfall seen in Argentina in the coming days may not be timely enough to prevent severe crop losses this season, with some private forecasts calling for as much as a 15 million metric ton decline in Soybean production from earlier estimates of nearly 55 million metric tons. The most recent Commitment of Traders report shows large speculators are holding a very large net-long position in Soybeans (over 186,000 contracts) as of December 28th, and the chances of further long liquidation selling are enhanced, at least in the near-term, as traders begin to pare their positions ahead of the USDA Crop production report on January 12th. This report will announce the final production figures for the 2010 crop and has the potential to trigger extreme price moves should the government's figures differ sharply from pre-report estimates.
Technical Notes
Looking at the daily chart for March Soybeans, we notice that since prices broke-out to the upside back in August of last year, there have been two "bull flag" formations on the daily charts. These chart patterns resolved themselves in the direction of the major trend, which in the case of Soybeans was up. Prices are now forming what could be a third "bull flag", which if true, could signal even higher prices are ahead. On the downside, the 14-day RSI is showing a bearish divergence, as the recent high in Soybean prices was not accompanied by a new high reading in the RSI. The next support level for March Soybeans is seen at 1269.00, with resistance found at the contract high of 1409.00.
Mike Zarembski, Senior Commodity Analyst
