Wheat Option Comment (Wheat can’t stay down forever)

Wheat options by Thomas Barry (TQB): Wheat can’t stay down forever. A nice pop on Tuesday

 

There was some action in the wheat options on Tuesday (18,000+ contracts), and it was accompanied by a pretty impressive rally in the underlying futures.  The market added a quick 3 cent jump in the final minute to cap off a 21 1/2 cent rally from deeply discounted flat price levels, with implied options volatility also ending at the highest marks of the session.  And although it was certainly a welcome change of pace from the plodding break that took us to levels not seen in 3 years, it was also high time for the market to do some retracing.  Money flow was the likeliest catalyst, as a recent size sell-off in the equities gave at least temporary credence to the notion of re-positioning some of the other sectors like ours.  Fortis, ICAP, Macquarie, and Rand (fund related) were all in and out of the wheat options  pit on Tuesday doing things like buying calls, buying straddles, swapping straddles, buying puts covered, selling put spreads, buying call spreads, and finally bidding for some Dec. strangles and then buying them in the closing seconds.  Some of the bigger orders were met with paper sellers to offset the one-sided nature of the trade, but the prevailing trend was undoubtedly slanted in favor of premium buyers…and why not, considering how well the short side for flat price theta and vega over the last few weeks has panned out.  Fund shorts were initiated are so far to the upside that need to cover futures at this point is way down the list of priorities, but buying cheap calls in the Mar., May and even the July stand as perfectly viable ways to approach this wheat market with fairly conservative strategies.  The fact that the market ended on its highs means that traders will respect the trend here until they see ample interest from paper coming from the sell side, as locals will try to stay up to pace with each consecutive paper order so that they can gauge just how willing and able the interest is becoming ahead of Monday’s supply and demand report from the USDA.  They would almost certainly be willing to oblige graduated bids to their graduated offers all the way through Friday’s session. But seeing as we’re only looking out from Tuesday’s close, a continuation through the end of the week would have us quite worked up, and therefore not likely.  Look for resistance almost a dime above Tuesday’s close to hold, but that means we could still be in for more solid trade here til then.  The Mexican buying program seems to have waned in the last two weeks, and it’s difficult to determine if they participated Tuesday (they usually come for the July and Sept. straddles), but if they do in fact have more items on their agenda before the report, then they could add a fresh wrinkle here in the next couple sessions.  Either way, it was a welcome change to see widespread business in the market.

 

Remember – Whoever undertakes to set himself up as a judge of Truth and knowledge is shipwrecked by the laughter of the gods.

 

WHEAT     ATM^    VOL

H580^      24-26      24 1/4

J590^       37-40       23

K590         50-52      23

N590^      69-71      24 1/2

U600^      87-89      25

Z610^       100-102  23 1/2

 

KC WHEAT   ATM^      VOLS

H650^         23-25      20 1/2

K640^         48-50      20 1/4

N630^         67-70      22 1/4

Z650^          97-99      21

 

 

Thomas Barry