Strategy Idea: Long term bearish play in wheat

CBOT Wheat tends to run into seasonal headwinds in mid-October, today's rally might be a bearish opportunity.

According to MRCI, the wheat market rolls over in mid-October for a two-to-three-week period. However, in the bigger picture, $10.00 wheat is probably unsustainable despite today's rally on the news of Russian aggression in Ukraine. That said, we've seen what being early in wheat can do, so we prefer using deep OTM option strategies that give traders the ability to ride out short-term chaos (unless we get a repeat of this spring's type of chaos which is highly unlikely).

The large price spike in wheat has caused OTM call options to gain substantial value and puts to lose value. Thus, it feels like a good day to sell a call option and use the proceeds to purchase a put spread.

Alternative strategies

Limited risk traders could consider either buying the March $8.00 put outright for about 26 cents $1300 (theoretically unlimited profit potential) or buying the $9.00/$8.20 put spread for about 34 cents or $1700 and a max profit of $3300 before considering transaction costs.

March wheat bear put spread with a naked call

BUY 1 MARCH WHEAT $9.00 PUT.

SELL 1 MARCH WHEAT $8.00 PUT.

SELL 1 MARCH WHEAT $12.00 CALL.

Total COST = About 2 cents or $100 before considering transaction costs.

These options expire on February 24, with 137 days to expiration.

Margin = $2500.

Risk = Unlimited above $12.00.

Maximum Profit = About $5,000 if held to expiration and wheat is below $8.00. Traders are unlikely to hold to expiration, a reasonable profit target would be $1,500 to $3,000.

Zaner360 symbols

OZWH23 P9, OZWH23 P8, OZWH23 C12.