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South Central Iowa | I would definitely talk to a broker. I am not much of an options guy and there are probably better options people on this site than me. This is just my suggestion if you want to pursue that strategy.
$4.20 Puts are expensive, I see December put trading 53'4 right now....... hmmmmmmmmmmmm......
You are going to need December under $3.67'4 in order to profit and you are going to lose time value later in the year, i.e. if we are at $4.20 in June you could probably buy the atm put for 15-25 cents and you spent 54 right now. I would do a bull spreading married put if I were wanting to do that. I would buy the December expiration put and buy an offsetting September outright future. I suggest the September because it will capture the whole of the weather season and we have good carry that would likely shrink if/when we have a rally spike. Last year on 3/11/16 ZCU16 closed at $3.73'6 and ZCZ16 closed at $3.82'2, a carry of 8'4 cents. On the high of 6/17/16, ZCU16 closed at 4.43'0 and ZCZ16 closed at $4.48'6, a carry of 5'6 cents. So you narrowed 2'6 cents, which isn't much, but does cover all your fees and broker commissions.
So as an example; you buy the put tomorrow for 53 cents as we Dec trades $3.86 and buy the offsetting Sept future at $3.79; a 7 cent carry. Then come May 25, or something, we spike on a dry weather forecast and mild to moderate drought covers Kansas, Missouri, Southern and Central Illinois, Southern and Western Iowa and Eastern Nebraska. Nearby July spikes through $4.18'6 up to $4.24 and Sept drops its carry to July a little but rises to Dec a little and closes at $4.28 while Dec closes at $4.30, a gain on your spread of 5 cents. You could liquidate your future position at that point and will have netted 41 cents, dropping the cost of your put to effectively 12 cents. $4.20 Dec puts would be trading at 15-25 cents at that point, so you could afford to buy a short-dated call for September expiration or something for a little cheaper with that 5-15 cent difference and would be covered with the Long Strangle. So you might be long $4.20 Dec Put and long $5.10 SDNC Call Sept Exp. for the same money at that point as you would be buying $4.20 Dec puts alone. This is just a hypothetical though.
You would want a stop for that September future contract. You know your risk tolerance the best. I have us on major support right now in corn based off a channel, trend line, and Point and Figure. I go off the continuous chart, so May needs to hold $3.62'4, and under that I have support at $3.57 on 1/3 speed, PnF at $3.50, a lower median line of a fork at $3.45, and an old low at $3.43'2. So September, using the current spread of 15 cents, would be $3.77'4, $3.72, $3.65, $3.60, and $3.58'2; I wouldn't use $3.77'4. Another good option is to use the call premium; a $4.20 call for a Straddle with your $4.20 put currently trading 20 cents. So using the premium as your stop loss on the future, that would give you $3.59 if you bought tomorrow like the example at $3.79.
So, to recap my suggestion if you want to buy an in the money $4.20 put. Buy the put and offset with a long September future; stop below between $3.58 and $3.72, whatever your tolerance of loss is. Hold until put is just below the money or charts and market begin to give warning signs. If we surpass $4.20, look at taking profit on the September future and protecting future upside with a Strangle by purchasing a short dated new crop call September expiration for the difference in your effective $4.20 put price and current put price. That is mathematically represented by the $4.20 put premium at that future time - Initial Put premium + Gain from Sept Future.
You should definitely consult a Broker about such a strategy.
Good Luck!
Edited by Conan the Farmer 3/13/2017 08:43
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Dad's Old Bull
