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This week’s continuation of this month’s impressive rally above last week’s 9.24 high leaves 23-Mar’s 9.13 low in its wake as the latest smaller-degree corrective low and new short-term risk parameter the market needs to sustain gains above to maintain a more immediate bullish count.
This smaller-degree yet objective risk parameter may come in very handy given the market’s proximity to 07Dec15’s pivotal 9.27 high and resistance, the nicely developing potential for a bearish divergence in momentum and ahead of tomorrow’s key crop reports. If there’s a place and time for this market to fail miserably and reverse lower, it is from current price levels and now, and a failure below 9.13 would be the first objective evidence of such.
By the same token and conversely, if there’s an absolutely key threshold the soybean market needs to recoup to threaten or break the secular bear trend, we believe it is this 9.27-area in the new crop Nov contract and the 9.20-area shown in the weekly log active-continuation chart above. Indeed and as we’ve been discussing for months, this entire 9.20-to-9.04-range provided huge support from Oct’14 until Aug’15’s breakdown. Since that time this 9.20-area has provided new major resistance. A clear recovery above this area would break the major downtrend from AT LEAST Jul’15’s 10.45 high and possibly the secular bear trend from Sep’12’s 17.89 all-time high.
Additionally and as we’ve noted before, the Fibonacci fact that the 3-1/2-year secular bear market from Sep’12’s 17.89 has spanned and identical length (i.e. 1.000 progression) to BOTH 2008’s 16.36 – 7.76 collapse and 2004-05’s 10.64 – 4.98 meltdown is remarkable. COMBINED with historically bearish sentiment in the Bullish Consensus (marketvane.net) and the market currently at the door step of a key longer-term technical gateway at 9.20 (9.27 in SX), it is not hard at all to find evidence for a MAJOR BASE/reversal environment.
These issues considered, a bullish policy remains advised with a failure below 9.13 required to pare or neutralize bullish exposure ahead of a peak/reversal prospect that could re-expose the secular bear. In lieu of such sub-9.13 weakness further and possibly surprising gains remain expected. Given the major significance of the 9.20/9.27-area on which the May and Nov contracts is teetering, please see favorable risk/reward yet conservative option strategies below that will allow for participation in a big crop report-related move as well as a good night’s sleep tonight.
BULL SPEC – MAY SHORT-DATED 9.40 / NOV 11.40 CALL DIAGONAL
This trade involves buying 1-unit of the May Short-Dated 9.40 calls around 8-3/4-cents and selling the Nov 11.40 calls around 8-cents for a net cost of about 3/4-cents. The long calls expire on 22-Apr (23 DTE) while the Nov options don;t expire until 21-Oct (205 DTE). Along with the long calls being closer-to-the-money, this diagonal spread has a whopping 10:1 gamma ratio that allows the long calls to outperform on a rally per the P&L graph below.
And while the long calls will lose more than the short calls on a sharp decline in the underlying, the relatively low nominal cost of each option and risk from an even farther-out-of-the-money Nov 11.40 call makes for negligible risk all around on a big decline in the contract.
As always the biggest risk to diagonal spreads stems from boring, lateral price action in the underlying contract as the benefits of a high-gamma options come in exchange for higher theta, or time-decay risk. But with what will be 22 days left between tomorrow’s key crop reports and the expiration of the May short-dated calls, the market will have plenty of time to show its directional hand before theta risk becomes an issue.
Finally, the greatest benefit of a call diagonal spread is a sharp move in the intended direction that sees the long call position evolve into an aggressive near-outright-futures position on a sustained breakout above 9.40. Should such an upside breakout unfold and be sustained, this option strategy has theoretical profit potential of $2.00! Not bad for a 3/4-cent bet that also has negligible risk on a sharp collapse in the underlying.
BEAR SPEC – MAY SHORT-DATED 9.10 / NOV 8.00 PUT DIAGONAL
The risk/reward merits and option characteristics of this put diagonal are the same as those detailed above for the call diagonal, only inverted. This trade involves buying the May Short-Dated 9.10 puts for around 7-3/4-cents and selling the Nov 8.00 puts around 7-cents for a net cost of 3/4-cents on the spread. This strategy also has a huge gamma ratio of 9:1 that will allow for this trade to perform wonderfully on a sharp, crop report-related failure below 9.10 will assuming negligible risk if the underlying explodes higher above the technically key 9.27 threshold.
Please contact your RJO representative for updated bid/offer quotes on these strategies.
