In this example, hypothetical farmer John Anderson intends to plant 2,000 acres of soybeans in 2018 with an expected yield of 55 bushels per acre. He has yet to take any action to hedge next year’s risk, but he wants to take advantage of the recent strength in the soybean market. Given Anderson’s projected profitability against the current November 2018 futures price, the Silveus Financial proprietary HedgeTRAK recommends being 25% hedged.
Buying a put spread to protect the current price, around $10.00 a bushel, all the way down to $8.80, while selling calls to give away upside above $11.00 on 50,000 bushels of Anderson’s expected production takes him up to 25% hedged, protecting some downside risk while leaving most of the upside intact.
Standard Matrix: Note the fall from $75 expected profitability currently to a loss of $8 an acre with futures prices down @ 8.60 by next year’s harvest.
The trade itself: Buying 10 SX18 10.00-8.80 put spreads, selling 10 SX18 11.00 calls for a net cost of 4 cents per bushel.