Trading Weather-driven Grain Markets

September 30, 2017 01:22 PM
The plethora of derivative products in the grain complex provides opportunities for profitable trades in weather-driven markets.

Know your Delta
As shown earlier, corn is not as volatile as wheat and because of the volatility difference, it is expected that Delta-neutral trades in corn should perform better than delta neutral trades in wheat. “Corn delta neutral” (below) shows that the maximum profit on the trade occurs at the strike price chosen to trade calls against the underlying futures contract. For this reason we are not looking for volatility in this delta neutral trade, but prefer futures prices that stay close to the middle of the expected price range. A glance at the profit and loss column of Delta-neutral confirms that serious losses occur when the futures price strays too far up or down. Futures price changes that threaten the high and low loss ranges would require protective trades to reduce risk.

As shown in “ETFs show effect of grains on livestock” (below) the price of grains has a strong impact on markets such as livestock and energies due to corn’s use for feed and in ethanol. After falling in price through the early part of 2017, the feed grains for cattle and hogs stabilized and began to increase in April, resulting in price increases for the ETF COW that combines cattle and hog futures.

Grain futures, options and ETFs offer a wide range of potentially profitable trades. Because they are subject to the same strong seasonal and weather-related forces, any anomalies in the price of the various derivative products offer an opportunity for a profitable trade.

There are many ways to counteract the risks and take advantage of unusually large price spreads. A careful study of the various prices and their relationship to each other provide clues to the curious trader.   

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About the Author

Paul Cretien is an investment analyst and financial case writer. His e-mail is