USDA Report Day in Grains

USDA Report Day in Grains

USDA Report Day in Grains
USDA Report Day in Grains Getty Images

With all of this week’s scheduled headline events, which included economic releases, the European Central Bank meeting, British Parliament elections and the James Comey testimony to the U.S. Senate, it was suppose to be a volatile week in currency pairs, stock indices and gold. However, against expectations, the overall price action has been quiet.

With the week closing today, it’s possible that the most active market maybe agricultures, as the U.S. Department of Agriculture’s supply and demand report will be published today at noon EST.

This report is very important, increasingly so this time of year as grains and oilseeds have been planted around the U.S.

The chart below shows soybean futures. On the left, each bar represents two days going back to last year; and as you can see, this future topped out almost one year ago on June 10th and has since traveled more than 20% lower. All this is to say that the June USDA reports come at a volatile time in these markets.

USDA Report Day in Grains

The chart to the right shows four-hour candlesticks going back a little more than a month. Both charts show a clear downtrend. However, since the end of May, soybeans have been traveling higher on what analysts consider to be a short covering rally.

Because of the thinner and more volatile markets on report day, we prefer to use binary options on soybeans. The possibility of a limit up or down move always exists. With binary options, the risks are limited in such a circumstance, so even if a limit move against our position occurred, we would suffer no greater losses than that of our initial position.

USDA Report Day in Grains

Once this market opens at 9:30 a.m. EST and the binary options become active, we will watch how it trades in the first hour and then will look to implement a binary strategy. The strategy we will use will depend on the option pricing. If by our model we consider the options at a lower value, then we will straddle the market using at the very least a 2:1 return on risk model where we simultaneously buy an out-of-the-money option and sell an in-the-money option, thus creating a position that can potentially be profitable on a large enough move in either direction.

However, if the option prices are considered expensive by our model, then we will take the opposite side of  the straddle by selling the higher strike OTM option and buying the lower strike to try to trap the market in between the options. We will look for a near 1:1 return on this strategy. With the last few USDA reports having been very quiet, this strategy could be useful in the event of another quiet report day.

Among the levels we are watching to the upside will be $938.00, which is what sets our bull/bear bias in this market in the short term. Above is $980.00 as a target and as potential resistance, and below will be $911.00 as a target with potential support. These levels are based on a swing basis, but any could come into play.

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