Closing the Gap - Futures Edition

Trading Corn Futures

| Aug 8, 2014
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    Closing the Gap - Futures Edition

    Trading Corn Futures

    Aug 8, 2014

    Pete Mulmat from the CME joins Tom and Tony to discuss the ins and outs of trading corn futures. As an introduction, Pete outlines the basic contract specifications of corn futures at the CME. Trading under the ticker /ZC, the corn futures represent 5,000 bushels of corn, with each tick size being ¼ of a cent per bushel and $12.50 per tick. At the time of airing, the initial margin on a /ZC contract was $1,650 with maintenance being $1,500.

    Next, Pete breaks down the annual cycle that impacts the corn futures regarding planting mostly occurring in April. He notes that there is a sensitivity to weather during July through August, while the harvesting occurs in October and November. At the time of airing, the December contracts represent the new crop while the other months represent the old crop, which is already harvested.

    When looking at agriculture futures, the differences between the front and back months is known as the “cost of carry.” This includes insurance costs, interest, and storage of physical grain. When near months are more expensive (inverted market), then we have a shortage of immediate supply.

    Next, the boys take a glance at the volatility of corn and compare it to volatility on soybeans. Both contracts have a tendency to see peak in late June, which occurs because traders are uncertain about the acreage being planted.

    Pete goes on to explain that grain markets move differently to the financial markets with respect to volatility. Volatility often declines with a falling price in the grain market. Additionally, put skew becomes cheaper than the call skew.

    The guys go over the current situation of the corn market. Grain prices were down 25% while the crop condition was the best we’ve seen since 1994. Additionally, corn volatility was at its highest level since October 2013 (24.1%)

    Finally, Pete sets up some trade ideas in the corn futures options market. He looks at two defined risk spreads, a short put spread and an at-the-money calendar spread. The three main benefits of using the options are risk management, margin efficiency, and flexibility.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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