This Thursday, the USDA will release a report affecting several agricultural futures, including soybean futures. While the U.S. has concluded its soybean harvest and awaits the next planting season, South America, which produces large exports of beans, is currently in its growing season. This week’s report will give an indication of grain stocks in the U.S. through the end of the last year and will provide a deeper picture of supply vs. demand heading into the upcoming U.S. planting season.
Many grain traders’ comments have suggested that Thursday’s report will be very relevant and could spur a good amount of volatility. The chart below, which goes back nearly a year, shows last year’s volatility in beans, followed by a quieter period in the latter part of the year. The trend lines show a triangle or wedge forming, a technical indicator suggesting that the consolidation period for soybeans is winding down and that this future could break in either direction, just in time for the upcoming planting season.
Considering last year’s trends and the technicals on the chart, this week’s report may serve as a catalyst to push prices, making soybeans a very interesting market to trade. In spite of this, it is not recommended to trade into the USDA report using outright futures, especially for retail traders, because with a market that can move limit up or down on these moves, the potential risk for a small trader could be catastrophic.
However, binary options present opportunities in the regulated markets for traders to take advantage of opportunities like this while limiting risk and maintaining flexible positions that could profit from a move in either direction.
The current table for weekly soybean options expiring at Friday’s 2:15 EST close (see below) can provide an indication of how this market may be traded. Please remember that potential trades discussed are not recommendations, but illustrations of the many ways binary options can be used to fit any market view.
When choosing a binary strike, if you believe the market will rise above that binary strike, then you would purchase it; or if you believe the market will close below it, then you would sell that strike. These binary options have a base value of $100 per contract. When buying a binary option, the risk of the trade is limited to the purchase price, while the potential profit is the difference between that purchase amount and the $100 value. When selling a binary option, the potential reward is the sale price, while the risk is the difference between the sale price and the $100 value.
Although these options can be traded individually, we will take a look at a couple of ways to combine binary options trades on soybeans according to prices going into Monday’s close. First, we will look at a strangle, a trade that combines two options in a strategy that may profit on a move in either direction outside those strikes. As an example, a strangle could be traded using the 1025.50 and 975.50 strike options above. These prices are marked on the chart by yellow lines. The strikes are within the recent range and are still within the trend lines; but the option pricing may be considered “cheap” and worth trading as a strangle.
To trade a strangle using these two strikes, you would buy the 1025.50 option for the $20.75 offer and sell the $975.50 strike at the bid of $80.75. Your potential profit if soybeans settle outside either of these strikes at the close of the week would be $60.00 per contract, found by taking the profit from the profitable contract minus the risk from the losing contract. The risk if both of these options settle worthless would amount to $40.00. Therefore, this trade offers about the potential of a 150% return on risk, trading on the USDA report and using targets that are within the recent range.
To do this, you could sell the higher strike (1025.50) for $10.75 and buy the lower strike (975.50) for $90.75. This trade would be considered higher probability based on the market’s pricing of the options, and because of this, requires a greater dollar investment and involves a lower percentage return. The combined risk for this trade would be $180 ($89.25 on the first leg and $90.75 on the second leg), and the combined potential profit would be $20 ($10.75 + $9.25), which would be about a 10% return on investment on a settlement between the strikes at Friday’s close.
Binary trading is a fast-growing movement in the U.S. and around the world; and with CFTC-regulated binary options, traders have the opportunity to build strategies based on their individual market views.
Note: Exchange fees not included in calculations.