Selling (Going Short) Corn Futures to Profit from a Fall in Corn Prices

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Contents

Selling (Going Short) Corn Futures to Profit from a Fall in Corn Prices

If you are bearish on corn, you can profit from a fall in corn price by taking up a short position in the corn futures market. You can do so by selling (shorting) one or more corn futures contracts at a futures exchange.

Example: Short Corn Futures Trade

You decide to go short one near-month Euronext Corn Futures contract at the price of EUR 129.25/ton. Since each Corn futures contract represents 50 tonnes of corn, the value of the contract is EUR 6,463. To enter the short futures position, you have to put up an initial margin of EUR 700.00.

A week later, the price of corn falls and correspondingly, the price of Euronext Corn futures drops to EUR 116.33 per tonne. Each contract is now worth only EUR 5,816. So by closing out your futures position now, you can exit your short position in Corn Futures with a profit of EUR 646.25.

Short Corn Futures Strategy: Sell HIGH, Buy LOW
SELL 50 tonnes of corn at EUR 129.25/ton EUR 6,463
BUY 50 tonnes of corn at EUR 116.33/ton EUR 5,816
Profit EUR 646.25
Investment (Initial Margin) EUR 700.00
Return on Investment 92%

Margin Requirements & Leverage

In the examples shown above, although corn prices have moved by only 10%, the ROI generated is 0%. This leverage is made possible by the relatively low margin (approximately 11%) required to control a large amount of corn represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

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Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

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Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

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Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

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Buying Corn Put Options to Profit from a Fall in Corn Prices

If you are bearish on corn, you can profit from a fall in corn price by buying (going long) corn put options.

Example: Long Corn Put Option

You observed that the near-month Euronext Corn futures contract is trading at the price of EUR 129.25 per tonne. A Euronext Corn put option with the same expiration month and a nearby strike price of EUR 130.00 is being priced at EUR 8.6200/ton. Since each underlying Euronext Corn futures contract represents 50 tonnes of corn, the premium you need to pay to own the put option is EUR 431.00.

Assuming that by option expiration day, the price of the underlying corn futures has fallen by 15% and is now trading at EUR 109.90 per tonne. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying corn futures at the strike price of EUR 130.00. In other words, it also means that you get to sell 50 tonnes of corn at EUR 130.00/ton on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying corn futures at the market price of EUR 109.86 per tonne, resulting in a gain of EUR 20.10/ton. Since each Euronext Corn put option covers 50 tonnes of corn, gain from the long put position is EUR 1,005. Deducting the initial premium of EUR 431.00 you paid to purchase the put option, your net profit from the long put strategy will come to EUR 574.00.

Long Corn Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (EUR 130.00/ton – EUR 109.90/ton) x 50 ton
= EUR 1,005
Investment = Initial Premium Paid
= EUR 431.00
Net Profit = Gain from Option Exercise – Investment
= EUR 1,005 – EUR 431.00
= EUR 574.00
Return on Investment = 133%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the corn option sale will be equal to it’s intrinsic value.

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Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Hedging Against Falling Corn Prices using Corn Futures

Corn producers can hedge against falling corn price by taking up a position in the corn futures market.

Corn producers can employ what is known as a short hedge to lock in a future selling price for an ongoing production of corn that is only ready for sale sometime in the future.

To implement the short hedge, corn producers sell (short) enough corn futures contracts in the futures market to cover the quantity of corn to be produced.

Corn Futures Short Hedge Example

A corn grower has just entered into a contract to sell 5,000 tonnes of corn, to be delivered in 3 months’ time. The sale price is agreed by both parties to be based on the market price of corn on the day of delivery. At the time of signing the agreement, spot price for corn is EUR 129.25/ton while the price of corn futures for delivery in 3 months’ time is EUR 130.00/ton.

To lock in the selling price at EUR 130.00/ton, the corn grower can enter a short position in an appropriate number of Euronext Corn futures contracts. With each Euronext Corn futures contract covering 50 tonnes of corn, the corn grower will be required to short 100 futures contracts.

The effect of putting in place the hedge should guarantee that the corn grower will be able to sell the 5,000 tonnes of corn at EUR 130.00/ton for a total amount of EUR 650,000. Let’s see how this is achieved by looking at scenarios in which the price of corn makes a significant move either upwards or downwards by delivery date.

Scenario #1: Corn Spot Price Fell by 10% to EUR 116.33/ton on Delivery Date

As per the sales contract, the corn grower will have to sell the corn at only EUR 116.33/ton, resulting in a net sales proceeds of EUR 581,625.

By delivery date, the corn futures price will have converged with the corn spot price and will be equal to EUR 116.33/ton. As the short futures position was entered at EUR 130.00/ton, it will have gained EUR 130.00 – EUR 116.33 = EUR 13.68 per tonne. With 100 contracts covering a total of 5000 tonnes, the total gain from the short futures position is EUR 68,375

Together, the gain in the corn futures market and the amount realised from the sales contract will total EUR 68,375 + EUR 581,625 = EUR 650,000. This amount is equivalent to selling 5,000 tonnes of corn at EUR 130.00/ton.

Scenario #2: Corn Spot Price Rose by 10% to EUR 142.18/ton on Delivery Date

With the increase in corn price to EUR 142.18/ton, the corn producer will be able to sell the 5,000 tonnes of corn for a higher net sales proceeds of EUR 710,875.

However, as the short futures position was entered at a lower price of EUR 130.00/ton, it will have lost EUR 142.18 – EUR 130.00 = EUR 12.18 per tonne. With 100 contracts covering a total of 5,000 tonnes of corn, the total loss from the short futures position is EUR 60,875.

In the end, the higher sales proceeds is offset by the loss in the corn futures market, resulting in a net proceeds of EUR 710,875 – EUR 60,875 = EUR 650,000. Again, this is the same amount that would be received by selling 5,000 tonnes of corn at EUR 130.00/ton.

Risk/Reward Tradeoff

As can be seen from the above examples, the downside of the short hedge is that the corn seller would have been better off without the hedge if the price of the commodity went up.

An alternative way of hedging against falling corn prices while still be able to benefit from a rise in corn price is to buy corn put options.

Learn More About Corn Futures & Options Trading

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Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
    BINOMO

    2nd place in the ranking!

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