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EC SD | You can buy a March 26 soybean call at $10.50 strike for 35 cents. OK - Why do that? Let's compare to taking a DP contract...
Note: Only buy calls, or store on DP, if you have conviction that prices will go higher in the coming months. Buying calls for next summer is very expensive, just like DP to next summer.
1) DP costs 8 cents per month and the call costs about 9 cents.
2) Risk of DP contract failure... Do you know the financial strength of the buyer, such that you would like to be their unsecured creditor?
3) If you sell for cash, and buy the call instead of DP, you get the cash now. This saves you interest cost, about 6 cents per month, making the call much cheaper than DP.
4) DP has basis risk. That can be good, if you think basis will tighten. Or bad, if basis widens. My experience is that buyers won't tighten basis (in their posted bid) when they have a lot of DP on the books. Instead they will put out private basis offers to attract grain delivery, and leave the DP contract holders from gaining on basis.
5) With the call, you can lower your cost by capping the upside. For instance sell the March 26 call at $11.50 for 9 cents to make it a spread trade. You would then have 4 months of exposure to higher prices, with a max gain of $1, at a cost of 26 cents - about 6.5 cents per month compared to DP at 8 cents monthly. Adjusting for interest, it is close to zero cost vs DP at 8 cents monthly.
Now, what if soybeans rally strong by end of the year, beyond $11.50 even. You have no more upside past that level, so close the position out. At that point you would have the $1 gain minus only about 12 cents of cost on the call spread, since you did not hold it to expiration. Nice 88 cents gain is achieved with the call approach. Meanwhile the DP approach would likely lose a dime or more in basis with rising futures, plus about 16 cents of storage and another 14 cents of interest. Still a win, but likely around 60 cents on that same dollar rally over two months.
Edited by FW30 10/19/2025 16:40
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Soybean upside call ideas?
