Author Topic: Wheat (ZWK19): 28 March 2019  (Read 303 times)

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Wheat (ZWK19): 28 March 2019
« on: March 28, 2019, 11:08:51 am »
I am trying to find a trading strategy in the Grains complex, for the more budget conscious (guys with smaller trading accounts who cannot afford the margin requirements on the British Pound; but who would like to build their accounts).  The extreme low IV at which these commodities trade at the moment makes it very difficult.

Here is a trade idea involving Wheat, which of all the grains are the most luck-lustre - it does not look like it is going anywhere.  That is what we want, we do not want wheat to go anywhere.  We can make money if it does just nothing...- just stay where you are, don't move. (This is probably one of the biggest advantages in trading options.  We are able to make money in flat markets, markets that goes nowhere.  Any other trading strategy, you need the market to move to make money.  Not so with Options.  We are quite happy to trade level markets!)

Note that we are setting up a double calendar position - we short a call in the front month and long a call in the back month; then short a put in the front month and long a put in the back month.  But then we short another Call and another Put in the front month.  You can further reduce the risk and the margin requirements by going 3/2.  Short three Calls and Puts in the front month, Long 2 Calls/Puts in the back month.

Profit from this position is about $1500 over the next 30 days, provided that Wheat goes nowhere.  If that slow upwards trend in wheat continues, it is fine, we are capturing that move.  We have a bit of risk on the downside, we do not want wheat to turn around.  But as long as wheat moves slowly - no sudden spikes in prices - it is all fine, it gives us plenty of time to realise the direction it goes and to get out of the trade.

The position involves four different positions.  My suggestion is try to set it up outside regular trading hours.  Prices are more stable, just leg into your different positions.  Please carefully look at the strike prices of your options relative to their underlying contracts, they are quite critical in this setup.  If you have a copy of the OE, I suggest setting up the trade in OE first, then experiment a bit with shifting individual strike prices up or down.  You will get a feel for how that influences your trade position, the price-area under which you are capturing your profit.