Kub's Den

When USDA releases its January crop reports -- the World Agricultural Supply and Demand Estimates (WASDE), and perhaps more importantly, the Dec. 1 Grain Stocks report -- it has historically triggered some big market movements. Old-crop grain prices flail up or down as traders adjust their outlooks for eager usage or overwhelming inventories. Back in the era when $4 corn was still a novelty, we could just about rely on the futures market getting locked either limit up or limit down on the day of the January reports release.

"Report day" volatility seems to have faded somewhat in more recent years, but even back in the heyday of grain market jumpiness, it was still very difficult to trade. Sure, you might anticipate a big double-digit move in corn prices after the report, but in what direction?

That's the textbook scenario in which options strategies like straddles and strangles are supposed to work well. You anticipate a moment of high market volatility -- prices are going to jump either higher or lower, but you don't know which way -- so you take options positions to cover both directions. Then, as long as the market moves to give you more gain than what you originally paid for the options, you would make a risk-free profit.

For instance, the current daily price limit for corn futures is 35 cents per bushel; the daily limit for winter wheat varieties is 50 cents; the daily limit for spring wheat is 60 cents; and the daily limit for soybean futures is 90 cents per bushel. Let's say we anticipate soybean prices might jump either up or down 90 cents after the release of the January WASDE report. If we could buy an at-the-money put option (that would profit if the market falls) for 30 cents per bushel and simultaneously buy an at-the-money call option (that would profit if the market rises) also for 30 cents, then as long as the market moves more than 60 cents (the total cost of our "straddle" trade) before the options expire, we would make a profit.

However, this has never actually worked on January report days.

Buying anticipatory straddles has historically been too expensive to be profitable and, over the past 13 January WASDE and Grain Stocks report days, it would have resulted in an average loss of 36 cents per bushel. For instance, last year on Jan. 11 (the day before the reports), let's say you bought a March corn call with a $5.00 strike price for 18.3 cents, plus a March corn put with a $5.00 strike price for 26.1 cents. This straddle position cost a total of 44.4 cents. Then, on Jan. 12, the reports were released and the market did experience a big shift -- at one point trading 3 cents lower during the session and at one point trading 25 cents higher ($5.17) during the session. When the market was at its intraday peak, your $5.00 call was "in the money," making you a profit on that leg of the straddle, but not enough of a profit to outweigh what you paid for the two options together.

This has historically been how it's gone for the classic straddle trade, if a trader bought at-the-money March corn options at the market price the day before the January reports.

In 2021: $5.00 call at 18.3 cents plus $5.00 put at 26.1 cents (total cost of straddle equals 44.4 cents)

Maximum intraday move on Jan 12, 2021: 25 cents

In 2020: $3.80 call at 11.2 cents plus $3.80 put at 8 cents (total cost of straddle equals 19.2 cents)

Maximum intraday move on Jan 10, 2020: -6.75 cents

In 2019: No January WASDE report (government shutdown)

In 2018: $3.50 call at 5.2 cents plus $3.50 put at 6.4 cents (total cost of straddle equals 11.6 cents)

Maximum intraday move on Jan 12, 2018: -3.25 cents

In 2017: $3.60 call at 7.3 cents plus $3.60 put at 10.1 cents (total cost of straddle equals 17.4 cents)

Maximum intraday move on Jan 12, 2017: -4.25 cents

In 2016: $3.50 call at 11 cents plus $3.50 put at 9.2 cents (total cost of straddle = 20.2 cents)

Maximum intraday move on Jan 12, 2016: 12 cents

In 2015: $4.00 call at 14.5 cents plus $4.00 put at 14.3 cents (total cost of straddle equals 28.8 cents)

Maximum intraday move on Jan 12, 2015: -10.25 cents

In 2014: $4.10 call at 13.7 cents plus $4.10 put at 11.7 cents (total cost of straddle equals 25.4 cents)

Maximum intraday move on Jan 10, 2014: 21 cents

In 2013: $7.00 call at 25.1 cents plus $7.00 put at 26.3 cents (total cost of straddle equals 51.4 cents)

Maximum intraday move on Jan 11, 2013: 25 cents

In 2012: $6.50 call at 31.2 cents plus $6.50 put at 29.6 cents (total cost of straddle equals 60.8 cents)

Maximum intraday move on Jan 12, 2012: -40 cents

In 2011: $6.00 call at 37.4 cents plus $6.00 put at 30.4 cents (total cost of straddle equals 67.8 cents)

Maximum intraday move on Jan 12, 2011: 30 cents

In 2010: $4.20 call at 19.4 cents plus $4.20 put at 17 cents (total cost of straddle equals 36.4 cents)

Maximum intraday move on Jan 12, 2010: -30 cents

And so on and so forth.

However, notice that the straddle almost worked in a couple of cases, like in 2014 when the straddle could be purchased the day before the report for 25.4 cents and then the corn market moved 21 cents higher. If the market had jumped just a little more and if the option positions could have been established just a little cheaper, there actually would have been a profit.

Veteran options traders will point out that there are indeed cheaper ways to undertake this general strategy, like venturing into less liquid segments of the options market or doing a "strangle" instead of a pure "straddle." Although a classic straddle before the January 2022 report might cost 38.7 cents (a March corn put option with a $6.00 strike for 19 cents plus a March call option with a $6.00 strike for 19.7 cents), we could instead consider a strangle using February options, which might only cost 16 cents overall (an out-of-the-money February put option with a $5.90 strike for 7.4 cents, plus and an out-of-the-money February call option with a $6.10 strike for 8.6 cents).

It may also be possible to profit from a pre-report straddle or strangle strategy if a trader is willing to hold the position longer after the report. In 2008, for instance, even the classic at-the-money straddle that would have cost 37.1 cents to establish (buy a March $4.70 corn call for 21 cents plus a March $4.70 put for 16.1 cents) would have eventually become profitable within two days of the report release after the March corn futures contract moved up to $5.19.

Ultimately, however, this history reminds us there is no such thing as a free lunch. Maybe a trader can confidently predict there will be volatility in the grain markets and know exactly when to expect that volatility, but the costs to cover every potential scenario in every possible direction are simply too high. In the end, the markets will never guarantee a profit.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

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