@sdelsad/commodity-desk-daily 1.0.53 → 1.0.55
This diff represents the content of publicly available package versions that have been released to one of the supported registries. The information contained in this diff is provided for informational purposes only and reflects changes between package versions as they appear in their respective public registries.
- package/email.html +91 -0
- package/email.txt +406 -0
- package/ep17.html +709 -0
- package/ep17_chart1.png +0 -0
- package/ep17_chart2.png +0 -0
- package/ep17_chart3.png +0 -0
- package/package.json +1 -1
package/email.html
ADDED
|
@@ -0,0 +1,91 @@
|
|
|
1
|
+
<!DOCTYPE html>
|
|
2
|
+
<html lang="en">
|
|
3
|
+
<head>
|
|
4
|
+
<meta charset="utf-8">
|
|
5
|
+
<meta name="viewport" content="width=device-width,initial-scale=1">
|
|
6
|
+
<meta http-equiv="X-UA-Compatible" content="IE=edge">
|
|
7
|
+
<meta name="x-apple-disable-message-reformatting">
|
|
8
|
+
<meta name="color-scheme" content="light">
|
|
9
|
+
<meta name="supported-color-schemes" content="light">
|
|
10
|
+
<title>Soft Commodity Trading — Ep 17: Options: The Fence, the Vol Crush and the Wing You Sold</title>
|
|
11
|
+
</head>
|
|
12
|
+
<body style="margin:0;padding:0;background:#ece7db;-webkit-text-size-adjust:100%;">
|
|
13
|
+
<div style="display:none;max-height:0;overflow:hidden;mso-hide:all;">How hedging desks actually use options: the fence around a physical position, worked through a WASDE three ways.</div>
|
|
14
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0" style="background:#ece7db;">
|
|
15
|
+
<tr><td align="center" style="padding:20px 10px;">
|
|
16
|
+
<table role="presentation" width="600" cellpadding="0" cellspacing="0" border="0" align="center" style="width:100%;max-width:600px;background:#faf7f1;border:1px solid #e3ddd2;">
|
|
17
|
+
<tr><td style="padding:30px 28px 24px;background:#faf7f1;"><p style="margin:0 0 6px;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;line-height:1.4;font-weight:bold;letter-spacing:.16em;text-transform:uppercase;color:#a8813c;">Soft Commodity Trading</p><p style="margin:0 0 14px;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.14em;text-transform:uppercase;color:#8b8375;">Episode 17 · Tuesday 8 September 2026 · 11 min 42</p><h1 style="margin:0 0 12px;font-family:Georgia,'Times New Roman',Times,serif;font-size:29px;line-height:1.2;font-weight:normal;color:#16110c;">Options: The Fence, the Vol Crush and the Wing You Sold</h1><p style="margin:0 0 22px;font-family:Georgia,'Times New Roman',Times,serif;font-size:17px;line-height:1.5;color:#4a4238;">How hedging desks actually use options: the fence around a physical position, worked through a WASDE three ways.</p><table role="presentation" cellpadding="0" cellspacing="0" border="0"><tr><td bgcolor="#1d4032" style="border-radius:6px;"><a href="https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/ep17.mp3" style="display:inline-block;padding:14px 28px;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:15px;font-weight:bold;color:#faf7f1;text-decoration:none;border-radius:6px;">▶ Listen — 11 min</a></td></tr></table></td></tr>
|
|
18
|
+
<tr><td style="padding:0 28px 22px;background:#faf7f1;"><p style="margin:0;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:13px;line-height:1.6;color:#4a4238;"><a href="https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/ep17.html" style="color:#1d4032;font-weight:bold;">Read this episode online →</a><span style="color:#8b8375;"> · charts, the quiz and the running glossary</span></p></td></tr>
|
|
19
|
+
<tr><td style="padding:0 28px;background:#faf7f1;"><table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0"><tr><td height="1" style="height:1px;line-height:1px;font-size:1px;background:#e3ddd2;"> </td></tr></table></td></tr>
|
|
20
|
+
<tr><td style="padding:24px 28px 4px;background:#faf7f1;"><p style="margin:0 0 12px;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;line-height:1.4;font-weight:bold;letter-spacing:.16em;text-transform:uppercase;color:#a8813c;">Market pulse</p><p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>Chicago was closed on Monday for Labor Day, so the tape still reads Friday — a complex that gave a little back from three-year highs, three days before a WASDE.</strong></p>
|
|
21
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0" style="width:100%;border-collapse:collapse;margin:0 0 20px;"><thead><tr><th align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:left;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Contract</th><th align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:left;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Last</th><th align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:right;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Change</th></tr></thead><tbody><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Dec corn (CBOT)</td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">536.75 c/bu</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;"><span style="color:#8a2f2f;font-weight:bold;">−4</span></td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Nov soybeans (CBOT)</td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">1,309.75 c/bu</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;"><span style="color:#8a2f2f;font-weight:bold;">−6½</span></td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Dec Chicago SRW (CBOT)</td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">734.00 c/bu</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;"><span style="color:#8a2f2f;font-weight:bold;">−20¼</span></td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Dec KC HRW (CBOT)</td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">802.25 c/bu</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;"><span style="color:#8a2f2f;font-weight:bold;">−13¼</span></td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Dec milling wheat (Matif)</td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">€246.25/t</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;"><span style="color:#8a2f2f;font-weight:bold;">−1.0%</span></td></tr></tbody></table>
|
|
22
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Corn is roughly thirteen cents below the three-year high it printed on Friday morning, and soybeans sit just under a two-and-a-half-year high. Nothing in the grain complex is cheap. What changed late last week was wheat, and the reason was diplomatic rather than agricultural. Chicago December wheat lost 20¼ cents on Friday and Matif December gave up one percent to €246.25, after touching a contract high of €259.25 on Wednesday — a two-year peak on the second month.</p>
|
|
23
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">The next scheduled event is Friday's WASDE. The trade is looking for a corn yield cut of two to three bushels an acre from the current 180.7. That is a market at a multi-year high, with a war being renegotiated in public, walking into a government report.</p>
|
|
24
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0" style="margin:6px 0 22px;"><tr><td align="center" style="border:1px solid #e3ddd2;background:#faf7f1;padding:10px;"><img src="https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/ep17_chart1.png" width="522" alt="December corn into the report — Corn climbed to a three-year high and then gave back a little into a holiday weekend. It enters Friday's WASDE near the top of its range, which is where option protection gets expensive. — CBOT settlements, 21 August to 4 September 2026, as reported" title="December corn into the report — Corn climbed to a three-year high and then gave back a little into a holiday weekend. It enters Friday's WASDE near the top of its range, which is where option protection gets expensive. — CBOT settlements, 21 August to 4 September 2026, as reported" style="display:block;width:100%;max-width:522px;height:auto;border:0;outline:none;text-decoration:none;"></td></tr></table><p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">US envoys travelled to Moscow and Kyiv over the weekend to discuss peace proposals. The market had already begun pricing that on Thursday and Friday, which is most of why wheat fell. Then, through the talks themselves, Russia struck Ukrainian grain facilities at Izmail on the Danube and at Chornomorsk, and Ukraine struck Russian refineries at Ryazan, in Perm and in Tatarstan.</p>
|
|
25
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">The mechanism is worth being precise about, because it is not a supply mechanism. Ukrainian shipments in the week to 2 September were 433,000 t — up 80 percent on the week, and still a fraction of a normal year. No loading capacity was repaired last week and none was destroyed on a scale that changes the season. What moved was the <strong>probability the market assigns to capacity returning</strong>. A war-risk premium is priced on an expectation, and an expectation reprices in an afternoon on a headline that loads no vessels. That is why the same week can carry a sharp sell-off and a set of strikes without contradiction.</p>
|
|
26
|
+
<ul style="margin:0 0 16px;padding-left:22px;"><li style="margin:0 0 9px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">A fence is not a cheaper put. It is a different trade, and the difference is volatility rather than price.</li><li style="margin:0 0 9px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Into a scheduled report, an option carries an event. The event decays on the calendar whether the number surprises anyone or not.</li><li style="margin:0 0 9px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Buying a put outright into a report is a long volatility position. A fence is close to flat on volatility, which is the actual reason hedging desks use it.</li><li style="margin:0 0 9px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">In grains the expensive wing is the upside, because supply fails upward. Selling a call to fund a put is selling the dear side, not the cheap one.</li><li style="margin:0 0 9px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">The strike sold because it "will never trade" is the one that costs the most, and it costs it in margin cash while the physical gain is still unrealised.</li></ul>
|
|
27
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0" style="width:100%;border-collapse:collapse;margin:0 0 20px;"><thead><tr><th align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:left;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Term</th><th align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:left;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">What it means</th></tr></thead><tbody><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;"><strong>Collar (fence)</strong></td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">Buying a put and selling a call against the same position, so the price is bounded on both sides</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;"><strong>Zero-cost fence</strong></td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">A fence whose strikes are chosen so the call premium received roughly equals the put premium paid</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;"><strong>Effective floor / ceiling</strong></td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">The strike adjusted by the net premium — the price level at which the hedge actually starts and stops working</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;"><strong>Wing</strong></td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">An out-of-the-money strike, away from where the market is trading</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;"><strong>Event volatility</strong></td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">The part of an option's implied volatility that exists only because a dated event falls before expiry</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;"><strong>Vol crush</strong></td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">The collapse in implied volatility immediately after a scheduled event, which cuts an option's value even when the future has not moved</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;"><strong>Skew</strong></td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">The difference in implied volatility between equidistant call and put strikes — in grains, usually richer on the call side</td></tr></tbody></table></td></tr>
|
|
28
|
+
<tr><td style="padding:0 28px;background:#faf7f1;"><table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0"><tr><td height="1" style="height:1px;line-height:1px;font-size:1px;background:#e3ddd2;"> </td></tr></table></td></tr>
|
|
29
|
+
<tr><td style="padding:24px 28px 4px;background:#f4efe4;"><p style="margin:0 0 12px;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;line-height:1.4;font-weight:bold;letter-spacing:.16em;text-transform:uppercase;color:#a8813c;">Conversion drill 5 of 12</p><h3 style="margin:0 0 12px;font-family:Georgia,'Times New Roman',Times,serif;font-size:19px;line-height:1.3;font-weight:normal;color:#16110c;">Metric tonne ↔ short ton</h3><p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>Rule:</strong> 1 metric tonne = 1.102 short tons · 1 short ton = 0.907 t</p>
|
|
30
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>Fast method:</strong> $/short ton → $/tonne: add 10%. $/tonne → $/short ton: take off 9-10%.</p>
|
|
31
|
+
<ul style="margin:0 0 16px;padding-left:22px;"><li style="margin:0 0 9px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Soybean meal $318/short ton → 318 + 32 = <strong>$350/t</strong> (exact 350.5)</li><li style="margin:0 0 9px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">$400/short ton → <strong>$441/t</strong></li><li style="margin:0 0 9px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">$500/t → 500 − 45 = <strong>$455/short ton</strong> (exact 453.6)</li></ul>
|
|
32
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>Why it matters:</strong> Chicago soybean meal trades in short tons while the physical trade quotes metric. Forgetting is a 10% error.</p></td></tr>
|
|
33
|
+
<tr><td style="padding:0 28px;background:#faf7f1;"><table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0"><tr><td height="1" style="height:1px;line-height:1px;font-size:1px;background:#e3ddd2;"> </td></tr></table></td></tr>
|
|
34
|
+
<tr><td style="padding:24px 28px 4px;background:#faf7f1;"><p style="margin:0 0 12px;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;line-height:1.4;font-weight:bold;letter-spacing:.16em;text-transform:uppercase;color:#a8813c;">Quiz</p><p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>Q1.</strong> You are long 30,000 t of physical SRW wheat, unpriced, against December Chicago at 734.00. You fence it: buy the December 720 put for 34 cents and sell the December 800 call for 26 cents. Black Sea diplomacy collapses in October and December wheat gaps to 865.00. What is your total P&L on the fenced position against what it would have been unfenced, and where exactly did the difference go?</p>
|
|
35
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>Q2.</strong> Friday's WASDE prints exactly in line with the trade estimate. December corn opens Monday unchanged. Your long 530 put is worth four cents less than it was on Thursday afternoon. What did you pay for that was not direction?</p>
|
|
36
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>Q3.</strong> You are long Matif December milling wheat against short Chicago December wheat on 30,000 t. The euro falls against the dollar. Which leg of your P&L did you not choose to own?</p>
|
|
37
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>Q4.</strong> No. 11 raw sugar at 17.56 c/lb sits about five cents above Brazilian hydrous ethanol parity of 12.60. Every Center-South mill that can swing to sugar has already swung. What can a further rally in raws actually accomplish?</p>
|
|
38
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>Q5 — conversion drill.</strong> December soybean meal settles at $355.10 per short ton. A Rotterdam buyer quotes in dollars per metric tonne. What is the equivalent, and what is the mental route?</p>
|
|
39
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0"><tr><td height="1" style="height:1px;line-height:1px;font-size:1px;background:#e3ddd2;"> </td></tr><tr><td height="22" style="height:22px;line-height:22px;font-size:1px;"> </td></tr></table>
|
|
40
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0"><tr><td height="1" style="height:1px;line-height:1px;font-size:1px;background:#e3ddd2;"> </td></tr><tr><td height="22" style="height:22px;line-height:22px;font-size:1px;"> </td></tr></table>
|
|
41
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0"><tr><td height="1" style="height:1px;line-height:1px;font-size:1px;background:#e3ddd2;"> </td></tr><tr><td height="22" style="height:22px;line-height:22px;font-size:1px;"> </td></tr></table></td></tr>
|
|
42
|
+
<tr><td align="center" style="padding:20px 28px;background:#f4efe4;border-top:1px solid #e3ddd2;border-bottom:1px solid #e3ddd2;"><p style="margin:0;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:12px;font-weight:bold;letter-spacing:.12em;text-transform:uppercase;color:#8a2f2f;">Solutions below — answer first</p></td></tr>
|
|
43
|
+
<tr><td height="240" style="height:240px;line-height:240px;font-size:1px;background:#faf7f1;"> </td></tr>
|
|
44
|
+
<tr><td height="240" style="height:240px;line-height:240px;font-size:1px;background:#faf7f1;"> </td></tr>
|
|
45
|
+
<tr><td style="padding:10px 28px 4px;background:#faf7f1;"><p style="margin:0 0 12px;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;line-height:1.4;font-weight:bold;letter-spacing:.16em;text-transform:uppercase;color:#a8813c;">Solutions</p><p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>A1.</strong> Start with the size. 30,000 t × 36.744 = 1,102,320 bushels, which is 220 lots at 5,000 bushels a lot (220.46, so you would round down and carry the remainder unhedged).</p>
|
|
46
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">The net premium is 34 cents paid less 26 cents received, so 8 cents debit. That puts the effective ceiling at 792.00 — the 800 strike less the 8 cents.</p>
|
|
47
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0" style="width:100%;border-collapse:collapse;margin:0 0 20px;"><thead><tr><th align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:left;padding:0 8px 8px 0;border-bottom:1px solid #16110c;"></th><th align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:right;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Unfenced</th><th align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:right;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Fenced</th></tr></thead><tbody><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Price captured</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">865.00</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">792.00</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Gain over 734.00</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">131 c/bu</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">58 c/bu</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">P&L</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">$1,444,039</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">$639,346</td></tr></tbody></table>
|
|
48
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">The difference is $804,693. It went to two places, and they add back exactly:</p>
|
|
49
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0" style="width:100%;border-collapse:collapse;margin:0 0 20px;"><thead><tr><th align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:left;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Component</th><th align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:right;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Amount</th></tr></thead><tbody><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Intrinsic value of the short 800 call (65 c/bu)</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">$716,508</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Net premium paid (8 c/bu)</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">$88,186</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Total</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">$804,694</td></tr></tbody></table>
|
|
50
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">The trap is thinking of that as a cost of insurance. It is not. It is the price of the outcome you were hoping for, sold in advance. And the timing is worse than the number: the $716,508 leaves your account as variation margin day by day as the market rallies, while the physical gain stays unrealised until the wheat is priced. A correct hedge becomes a funding problem — the same failure mode as episode 3, wearing a different costume.</p>
|
|
51
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>A2.</strong> Event volatility. The implied volatility in that put was carrying Friday's report. Once the report has printed, there is no longer an event between now and expiry, so the implied volatility falls and the option is repriced lower even though the underlying has not moved a tick. This is the vol crush, and it is not a market malfunction — it is the option correctly ceasing to price an uncertainty that has been resolved.</p>
|
|
52
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">The lesson underneath it: a bought put into a scheduled report is two positions, a directional one and a long-volatility one. You were right on neither, but you only chose one of them. A fence is the standard answer because the call you sell carries the same event premium as the put you buy, so the crush hits both sides and largely cancels.</p>
|
|
53
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>A3.</strong> The currency. The Matif leg settles in euros and the Chicago leg in dollars, so a spread that looks like a pure wheat position carries an unhedged FX exposure on the euro leg's full notional. You chose a view on European wheat against American wheat. You did not choose a view on EUR/USD, and on a 30,000 t position the currency move can take a large share of a correct spread call — in episode 16's worked example, €166,800 out of a €457,800 wheat profit. The FX leg is a risk you inherited rather than one you selected, which is the whole distinction worth carrying.</p>
|
|
54
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>A4.</strong> It can ration demand, and nothing else on the supply side. Above ethanol parity the switch is already spent: every mill with the flexibility to make sugar rather than hydrous is already making sugar, so a higher screen pulls no additional Brazilian tonnes into the sugar pool this season. What a rally can still do is price marginal buyers out — delay purchases, encourage substitution, draw on destination stocks — and pull cane forward from next season only to the extent the crush calendar allows. This is why the shape of the supply response matters more than its direction: the same five cents that would have bought tonnes at 13 buys only demand destruction at 17½.</p>
|
|
55
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>A5 — conversion drill.</strong> One metric tonne is 1.102 short tons, so a price per short ton becomes a price per tonne by adding about ten percent.</p>
|
|
56
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Mental route: $355.10 → 355 + 35.5 = <strong>$390.50/t</strong>. Exact: 355.10 × 1.102 = <strong>$391.32/t</strong>.</p>
|
|
57
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">The reason this one matters is that Chicago soybean meal is the odd contract out — it trades in short tons while the physical meal trade quotes metric. Forgetting costs you ten percent, and ten percent of a meal cargo is not a rounding error.</p></td></tr>
|
|
58
|
+
<tr><td style="padding:0 28px;background:#faf7f1;"><table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0"><tr><td height="1" style="height:1px;line-height:1px;font-size:1px;background:#e3ddd2;"> </td></tr></table></td></tr>
|
|
59
|
+
<tr><td style="padding:24px 28px 4px;background:#faf7f1;"><p style="margin:0 0 12px;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;line-height:1.4;font-weight:bold;letter-spacing:.16em;text-transform:uppercase;color:#a8813c;">The episode, in writing</p>
|
|
60
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">You are long 30,000 t of physical corn. That is 1,181,040 bushels, or 236 lots at 5,000 bushels a lot. It is unpriced and unhedged, the board is at 536.75, and there is a WASDE on Friday.</p>
|
|
61
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">The textbook answer is to sell futures. Kill the flat price, keep the basis — the whole argument of episode 2. But suppose you do not want to kill it. You think Friday's number is friendly and you would like to own the outcome if you are right.</p>
|
|
62
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">The next textbook answer is to buy a put. And this is precisely where a hedging desk does not stop, because a put into a scheduled report is expensive in a specific and knowable way.</p>
|
|
63
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">So they build a fence.</p>
|
|
64
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0" style="width:100%;border-collapse:collapse;margin:0 0 20px;"><thead><tr><th align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:left;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Leg</th><th align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:right;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Strike</th><th align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:left;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Premium</th></tr></thead><tbody><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Buy put</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">520</td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">−18 c/bu</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Sell call</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">560</td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;">+17 c/bu</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;"><strong>Net</strong></td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;"></td><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;"><strong>−1 c/bu</strong></td></tr></tbody></table>
|
|
65
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">One cent a bushel, or $11,810 on the position. In exchange, the flat price is bounded. Below <strong>519</strong> you cannot lose any more; above <strong>559</strong> you cannot make any more. Both figures are the strike adjusted by the penny of net premium. Forty cents of band for a penny.</p>
|
|
66
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0" style="margin:6px 0 22px;"><tr><td align="center" style="border:1px solid #e3ddd2;background:#faf7f1;padding:10px;"><img src="https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/ep17_chart2.png" width="522" alt="What the fence does to the P&L — The fence trades the tails for a band. Below 519 the loss stops at $209,635; above 559 the gain stops at $262,781. Everything outside those two levels belongs to somebody else now. — Worked example, episode 17 — 30,000 t of corn, 520 put / 560 call at 1c net debit" title="What the fence does to the P&L — The fence trades the tails for a band. Below 519 the loss stops at $209,635; above 559 the gain stops at $262,781. Everything outside those two levels belongs to somebody else now. — Worked example, episode 17 — 30,000 t of corn, 520 put / 560 call at 1c net debit" style="display:block;width:100%;max-width:522px;height:auto;border:0;outline:none;text-decoration:none;"></td></tr></table>
|
|
67
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>The yield is raised and corn breaks to 495.</strong> The physical loses $493,084. The 520 put pays 25 cents of intrinsic, or $295,260. After the penny of premium you are down $209,635 — and that is the worst it gets. At 470 it is the same number. At 450 it is still the same number.</p>
|
|
68
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>The yield is cut three bushels and corn runs to 585.</strong> The physical makes $569,852. The 560 call you sold costs you $295,260 of intrinsic. You keep $262,781, and that is the best it gets.</p>
|
|
69
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0" style="margin:6px 0 22px;"><tr><td align="center" style="border:1px solid #e3ddd2;background:#faf7f1;padding:10px;"><img src="https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/ep17_chart3.png" width="522" alt="Where the upside goes at 585 — On the friendly print you keep 46 percent of what the physical made. The call you sold is not a fee — it is the good outcome, sold in advance. — Worked example, episode 17" title="Where the upside goes at 585 — On the friendly print you keep 46 percent of what the physical made. The call you sold is not a fee — it is the good outcome, sold in advance. — Worked example, episode 17" style="display:block;width:100%;max-width:522px;height:auto;border:0;outline:none;text-decoration:none;"></td></tr></table>
|
|
70
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>The number lands exactly on the estimate and corn opens unchanged.</strong> This is the scenario worth the episode, because on a flat board most people assume nothing happened.</p>
|
|
71
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Something happened. The implied volatility in both options was carrying Friday's event, and Friday is now behind them. Implied volatility falls, and both options are marked lower on Monday than they were on Thursday with the future in the same place.</p>
|
|
72
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Had you bought the put alone, that is a straight loss on an unchanged market. In the fence, the call you sold was carrying the same event premium, in roughly the same amount. It gets crushed too, and you are short it. The two effects largely cancel.</p>
|
|
73
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;"><strong>That is the real reason a hedging desk fences rather than buying puts.</strong> Not that the put is expensive in an absolute sense. That the fence is close to flat on volatility while a bought put is emphatically long it. A hedger wants protection. A hedger does not want a position in how frightened the market will be next Tuesday, because that is a second view, and it is a view they have no edge in.</p>
|
|
74
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">The instinct carried over from equity index options is that puts are expensive because crashes are downside. Grains invert it.</p>
|
|
75
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">A corn crop can fail. It cannot over-succeed by the same magnitude. Supply shocks push the price up, so the fat tail is a rally, and out-of-the-money calls generally carry higher implied volatility than equidistant puts. Selling the 560 call to fund the 520 put is therefore selling the <strong>dear</strong> wing, not the cheap one, which is exactly why a penny buys forty cents of band.</p>
|
|
76
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Skew is also information, and it is one of the cleaner reads available. When call volatility trades well over put volatility, somebody is paying up for upside protection. It is not the farmer — the farmer's fear is a lower price. It is the consumer and the short: the feeder who has to buy, the exporter who has sold cargo they have not bought, the fund that is short into a weather market. Read that way, skew tells you the shape of the fear in the market, not merely its level.</p>
|
|
77
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Every hedger who sells a call says the same sentence to themselves, and the sentence is always some version of <em>that strike is never getting touched</em>.</p>
|
|
78
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Suppose it does. December corn at 620 in October, on a Black Sea escalation that nobody had in the model.</p>
|
|
79
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0" style="width:100%;border-collapse:collapse;margin:0 0 20px;"><thead><tr><th align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:left;padding:0 8px 8px 0;border-bottom:1px solid #16110c;"></th><th align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;font-weight:bold;letter-spacing:.09em;text-transform:uppercase;color:#4a4238;text-align:right;padding:0 8px 8px 0;border-bottom:1px solid #16110c;">Amount</th></tr></thead><tbody><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Physical gain at 620</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">$983,216</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Fence caps you at</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">$262,781</td></tr><tr><td align="left" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:left;border-bottom:1px solid #e3ddd2;vertical-align:top;font-weight:bold;">Handed back</td><td align="right" style="font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.45;color:#16110c;padding:9px 8px 9px 0;text-align:right;border-bottom:1px solid #e3ddd2;vertical-align:top;">$720,435</td></tr></tbody></table>
|
|
80
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Three-quarters of a million dollars of upside, given away for a penny. That is the honest accounting of a "costless" collar, and it is why the word costless does more damage than any other word in hedging.</p>
|
|
81
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">But the P&L is the smaller problem. The short call is a futures-style position at the exchange, so it margins daily. The $720,435 goes out of the account in variation margin as the market rallies — real cash, on a real clock — while the physical gain sits unrealised until the corn is priced and shipped. A perfectly correct hedge turns into a funding crisis. Episode 3 made this point about a plain futures hedge; a short option wing makes it sharper, because the loss is unbounded on the side the market is actually moving.</p>
|
|
82
|
+
<table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0" style="margin:0 0 20px;"><tr><td style="border-left:3px solid #a8813c;padding:4px 0 4px 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.55;font-style:italic;color:#4a4238;"><strong>TRADER:</strong> What do I pay for the 520 / 560 fence, December, 236 lots?<br><strong>BROKER:</strong> I make that a penny, you pay. Call side is bid well.<br><strong>TRADER:</strong> And if I move the call to 570?<br><strong>BROKER:</strong> Then you are paying five and a half. You are buying back the bit you actually want.</td></tr></table>
|
|
83
|
+
<p style="margin:0 0 16px;font-family:Georgia,'Times New Roman',Times,serif;font-size:16px;line-height:1.62;color:#16110c;">Two things in that exchange. First, neither party quotes a volatility — the fence trades as a single net premium in cents, because that is the number the hedger's committee approves. Second, and more important, the broker's last line is the whole trade in nine words. Moving the call strike up by ten cents costs four and a half cents of premium, because you are repurchasing the upside you had sold. The fence is not free protection. It is a trade in which you fund the bad outcome by selling the good one, and the closer the sold strike sits to where you think the market is going, the more it pays and the more it hurts.</p></td></tr>
|
|
84
|
+
<tr><td style="padding:0 28px;background:#faf7f1;"><table role="presentation" width="100%" cellpadding="0" cellspacing="0" border="0"><tr><td height="1" style="height:1px;line-height:1px;font-size:1px;background:#e3ddd2;"> </td></tr></table></td></tr>
|
|
85
|
+
<tr><td style="padding:24px 28px 4px;background:#faf7f1;"><p style="margin:0 0 12px;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:11px;line-height:1.4;font-weight:bold;letter-spacing:.16em;text-transform:uppercase;color:#a8813c;">Glossary</p><p style="margin:0;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:14px;line-height:1.6;color:#4a4238;">Every unit and expression the show has introduced lives on the episode page, and it stays up to date. <a href="https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/ep17.html#glossary" style="color:#1d4032;">Open the glossary →</a></p></td></tr>
|
|
86
|
+
<tr><td style="padding:22px 28px 30px;background:#ece7db;border-top:1px solid #e3ddd2;"><p style="margin:0 0 6px;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:12px;line-height:1.7;color:#4a4238;"><strong>Soft Commodity Trading</strong> — a daily briefing on physical commodity trading.</p><p style="margin:0;font-family:'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:12px;line-height:1.7;color:#8b8375;"><a href="https://storage.googleapis.com/podcast-audio-2647223968/index.html" style="color:#4a4238;">All episodes</a> · <a href="https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/feed.xml" style="color:#4a4238;">Subscribe by RSS</a> · <a href="https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/ep17.html" style="color:#4a4238;">This episode online</a></p></td></tr>
|
|
87
|
+
</table>
|
|
88
|
+
</td></tr>
|
|
89
|
+
</table>
|
|
90
|
+
</body>
|
|
91
|
+
</html>
|
package/email.txt
ADDED
|
@@ -0,0 +1,406 @@
|
|
|
1
|
+
SOFT COMMODITY TRADING
|
|
2
|
+
Episode 17 · Tuesday 8 September 2026 · 11 min 42
|
|
3
|
+
|
|
4
|
+
Options: The Fence, the Vol Crush and the Wing You Sold
|
|
5
|
+
How hedging desks actually use options: the fence around a physical
|
|
6
|
+
position, worked through a WASDE three ways.
|
|
7
|
+
|
|
8
|
+
Listen: https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/ep17.mp3
|
|
9
|
+
Read online: https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/ep17.html
|
|
10
|
+
|
|
11
|
+
MARKET PULSE
|
|
12
|
+
============
|
|
13
|
+
|
|
14
|
+
Chicago was closed on Monday for Labor Day, so the tape still reads Friday —
|
|
15
|
+
a complex that gave a little back from three-year highs, three days before a
|
|
16
|
+
WASDE.
|
|
17
|
+
|
|
18
|
+
Contract Last Change
|
|
19
|
+
------------------------------------------------
|
|
20
|
+
Dec corn (CBOT) 536.75 c/bu −4
|
|
21
|
+
Nov soybeans (CBOT) 1,309.75 c/bu −6½
|
|
22
|
+
Dec Chicago SRW (CBOT) 734.00 c/bu −20¼
|
|
23
|
+
Dec KC HRW (CBOT) 802.25 c/bu −13¼
|
|
24
|
+
Dec milling wheat (Matif) €246.25/t −1.0%
|
|
25
|
+
|
|
26
|
+
Corn is roughly thirteen cents below the three-year high it printed on
|
|
27
|
+
Friday morning, and soybeans sit just under a two-and-a-half-year high.
|
|
28
|
+
Nothing in the grain complex is cheap. What changed late last week was
|
|
29
|
+
wheat, and the reason was diplomatic rather than agricultural. Chicago
|
|
30
|
+
December wheat lost 20¼ cents on Friday and Matif December gave up one
|
|
31
|
+
percent to €246.25, after touching a contract high of €259.25 on Wednesday —
|
|
32
|
+
a two-year peak on the second month.
|
|
33
|
+
|
|
34
|
+
The next scheduled event is Friday's WASDE. The trade is looking for a corn
|
|
35
|
+
yield cut of two to three bushels an acre from the current 180.7. That is a
|
|
36
|
+
market at a multi-year high, with a war being renegotiated in public,
|
|
37
|
+
walking into a government report.
|
|
38
|
+
|
|
39
|
+
[chart] December corn into the report — Corn climbed to a three-year high
|
|
40
|
+
and then gave back a little into a holiday weekend. It enters
|
|
41
|
+
Friday's WASDE near the top of its range, which is where option
|
|
42
|
+
protection gets expensive. — CBOT settlements, 21 August to 4
|
|
43
|
+
September 2026, as reported —
|
|
44
|
+
https://storage.googleapis.com/podcast-audio-2647223968/commodity-
|
|
45
|
+
desk-daily/ep17_chart1.png
|
|
46
|
+
|
|
47
|
+
US envoys travelled to Moscow and Kyiv over the weekend to discuss peace
|
|
48
|
+
proposals. The market had already begun pricing that on Thursday and Friday,
|
|
49
|
+
which is most of why wheat fell. Then, through the talks themselves, Russia
|
|
50
|
+
struck Ukrainian grain facilities at Izmail on the Danube and at
|
|
51
|
+
Chornomorsk, and Ukraine struck Russian refineries at Ryazan, in Perm and in
|
|
52
|
+
Tatarstan.
|
|
53
|
+
|
|
54
|
+
The mechanism is worth being precise about, because it is not a supply
|
|
55
|
+
mechanism. Ukrainian shipments in the week to 2 September were 433,000 t —
|
|
56
|
+
up 80 percent on the week, and still a fraction of a normal year. No loading
|
|
57
|
+
capacity was repaired last week and none was destroyed on a scale that
|
|
58
|
+
changes the season. What moved was the probability the market assigns to
|
|
59
|
+
capacity returning. A war-risk premium is priced on an expectation, and an
|
|
60
|
+
expectation reprices in an afternoon on a headline that loads no vessels.
|
|
61
|
+
That is why the same week can carry a sharp sell-off and a set of strikes
|
|
62
|
+
without contradiction.
|
|
63
|
+
|
|
64
|
+
* A fence is not a cheaper put. It is a different trade, and the
|
|
65
|
+
difference is volatility rather than price.
|
|
66
|
+
|
|
67
|
+
* Into a scheduled report, an option carries an event. The event decays on
|
|
68
|
+
the calendar whether the number surprises anyone or not.
|
|
69
|
+
|
|
70
|
+
* Buying a put outright into a report is a long volatility position. A
|
|
71
|
+
fence is close to flat on volatility, which is the actual reason hedging
|
|
72
|
+
desks use it.
|
|
73
|
+
|
|
74
|
+
* In grains the expensive wing is the upside, because supply fails upward.
|
|
75
|
+
Selling a call to fund a put is selling the dear side, not the cheap
|
|
76
|
+
one.
|
|
77
|
+
|
|
78
|
+
* The strike sold because it "will never trade" is the one that costs the
|
|
79
|
+
most, and it costs it in margin cash while the physical gain is still
|
|
80
|
+
unrealised.
|
|
81
|
+
|
|
82
|
+
Term What it means
|
|
83
|
+
----------------------------------------------------------------------------
|
|
84
|
+
Collar (fence) Buying a put and selling a call against the same
|
|
85
|
+
position, so the price is bounded on both sides
|
|
86
|
+
Zero-cost fence A fence whose strikes are chosen so the call
|
|
87
|
+
premium received roughly equals the put premium
|
|
88
|
+
paid
|
|
89
|
+
Effective floor / ceiling The strike adjusted by the net premium — the
|
|
90
|
+
price level at which the hedge actually starts
|
|
91
|
+
and stops working
|
|
92
|
+
Wing An out-of-the-money strike, away from where the
|
|
93
|
+
market is trading
|
|
94
|
+
Event volatility The part of an option's implied volatility that
|
|
95
|
+
exists only because a dated event falls before
|
|
96
|
+
expiry
|
|
97
|
+
Vol crush The collapse in implied volatility immediately
|
|
98
|
+
after a scheduled event, which cuts an option's
|
|
99
|
+
value even when the future has not moved
|
|
100
|
+
Skew The difference in implied volatility between
|
|
101
|
+
equidistant call and put strikes — in grains,
|
|
102
|
+
usually richer on the call side
|
|
103
|
+
|
|
104
|
+
|
|
105
|
+
CONVERSION DRILL 5 OF 12 — METRIC TONNE ↔ SHORT TON
|
|
106
|
+
===================================================
|
|
107
|
+
|
|
108
|
+
Rule: 1 metric tonne = 1.102 short tons · 1 short ton = 0.907 t
|
|
109
|
+
|
|
110
|
+
Fast method: $/short ton → $/tonne: add 10%. $/tonne → $/short ton: take off
|
|
111
|
+
9-10%.
|
|
112
|
+
|
|
113
|
+
* Soybean meal $318/short ton → 318 + 32 = $350/t (exact 350.5)
|
|
114
|
+
|
|
115
|
+
* $400/short ton → $441/t
|
|
116
|
+
|
|
117
|
+
* $500/t → 500 − 45 = $455/short ton (exact 453.6)
|
|
118
|
+
|
|
119
|
+
Why it matters: Chicago soybean meal trades in short tons while the physical
|
|
120
|
+
trade quotes metric. Forgetting is a 10% error.
|
|
121
|
+
|
|
122
|
+
|
|
123
|
+
QUIZ
|
|
124
|
+
====
|
|
125
|
+
|
|
126
|
+
Q1. You are long 30,000 t of physical SRW wheat, unpriced, against December
|
|
127
|
+
Chicago at 734.00. You fence it: buy the December 720 put for 34 cents and
|
|
128
|
+
sell the December 800 call for 26 cents. Black Sea diplomacy collapses in
|
|
129
|
+
October and December wheat gaps to 865.00. What is your total P&L on the
|
|
130
|
+
fenced position against what it would have been unfenced, and where exactly
|
|
131
|
+
did the difference go?
|
|
132
|
+
|
|
133
|
+
Q2. Friday's WASDE prints exactly in line with the trade estimate. December
|
|
134
|
+
corn opens Monday unchanged. Your long 530 put is worth four cents less than
|
|
135
|
+
it was on Thursday afternoon. What did you pay for that was not direction?
|
|
136
|
+
|
|
137
|
+
Q3. You are long Matif December milling wheat against short Chicago December
|
|
138
|
+
wheat on 30,000 t. The euro falls against the dollar. Which leg of your P&L
|
|
139
|
+
did you not choose to own?
|
|
140
|
+
|
|
141
|
+
Q4. No. 11 raw sugar at 17.56 c/lb sits about five cents above Brazilian
|
|
142
|
+
hydrous ethanol parity of 12.60. Every Center-South mill that can swing to
|
|
143
|
+
sugar has already swung. What can a further rally in raws actually
|
|
144
|
+
accomplish?
|
|
145
|
+
|
|
146
|
+
Q5 — conversion drill. December soybean meal settles at $355.10 per short
|
|
147
|
+
ton. A Rotterdam buyer quotes in dollars per metric tonne. What is the
|
|
148
|
+
equivalent, and what is the mental route?
|
|
149
|
+
|
|
150
|
+
----------------------------------------------------------------------------
|
|
151
|
+
|
|
152
|
+
----------------------------------------------------------------------------
|
|
153
|
+
|
|
154
|
+
----------------------------------------------------------------------------
|
|
155
|
+
|
|
156
|
+
|
|
157
|
+
============================================================================
|
|
158
|
+
SOLUTIONS BELOW — ANSWER FIRST
|
|
159
|
+
============================================================================
|
|
160
|
+
|
|
161
|
+
|
|
162
|
+
|
|
163
|
+
|
|
164
|
+
|
|
165
|
+
|
|
166
|
+
|
|
167
|
+
|
|
168
|
+
|
|
169
|
+
|
|
170
|
+
|
|
171
|
+
|
|
172
|
+
|
|
173
|
+
|
|
174
|
+
|
|
175
|
+
|
|
176
|
+
|
|
177
|
+
|
|
178
|
+
|
|
179
|
+
|
|
180
|
+
|
|
181
|
+
|
|
182
|
+
|
|
183
|
+
|
|
184
|
+
|
|
185
|
+
|
|
186
|
+
SOLUTIONS
|
|
187
|
+
=========
|
|
188
|
+
|
|
189
|
+
A1. Start with the size. 30,000 t × 36.744 = 1,102,320 bushels, which is 220
|
|
190
|
+
lots at 5,000 bushels a lot (220.46, so you would round down and carry the
|
|
191
|
+
remainder unhedged).
|
|
192
|
+
|
|
193
|
+
The net premium is 34 cents paid less 26 cents received, so 8 cents debit.
|
|
194
|
+
That puts the effective ceiling at 792.00 — the 800 strike less the 8 cents.
|
|
195
|
+
|
|
196
|
+
Unfenced Fenced
|
|
197
|
+
--------------------------------------
|
|
198
|
+
Price captured 865.00 792.00
|
|
199
|
+
Gain over 734.00 131 c/bu 58 c/bu
|
|
200
|
+
P&L $1,444,039 $639,346
|
|
201
|
+
|
|
202
|
+
The difference is $804,693. It went to two places, and they add back
|
|
203
|
+
exactly:
|
|
204
|
+
|
|
205
|
+
Component Amount
|
|
206
|
+
---------------------------------------------------------
|
|
207
|
+
Intrinsic value of the short 800 call (65 c/bu) $716,508
|
|
208
|
+
Net premium paid (8 c/bu) $88,186
|
|
209
|
+
Total $804,694
|
|
210
|
+
|
|
211
|
+
The trap is thinking of that as a cost of insurance. It is not. It is the
|
|
212
|
+
price of the outcome you were hoping for, sold in advance. And the timing is
|
|
213
|
+
worse than the number: the $716,508 leaves your account as variation margin
|
|
214
|
+
day by day as the market rallies, while the physical gain stays unrealised
|
|
215
|
+
until the wheat is priced. A correct hedge becomes a funding problem — the
|
|
216
|
+
same failure mode as episode 3, wearing a different costume.
|
|
217
|
+
|
|
218
|
+
A2. Event volatility. The implied volatility in that put was carrying
|
|
219
|
+
Friday's report. Once the report has printed, there is no longer an event
|
|
220
|
+
between now and expiry, so the implied volatility falls and the option is
|
|
221
|
+
repriced lower even though the underlying has not moved a tick. This is the
|
|
222
|
+
vol crush, and it is not a market malfunction — it is the option correctly
|
|
223
|
+
ceasing to price an uncertainty that has been resolved.
|
|
224
|
+
|
|
225
|
+
The lesson underneath it: a bought put into a scheduled report is two
|
|
226
|
+
positions, a directional one and a long-volatility one. You were right on
|
|
227
|
+
neither, but you only chose one of them. A fence is the standard answer
|
|
228
|
+
because the call you sell carries the same event premium as the put you buy,
|
|
229
|
+
so the crush hits both sides and largely cancels.
|
|
230
|
+
|
|
231
|
+
A3. The currency. The Matif leg settles in euros and the Chicago leg in
|
|
232
|
+
dollars, so a spread that looks like a pure wheat position carries an
|
|
233
|
+
unhedged FX exposure on the euro leg's full notional. You chose a view on
|
|
234
|
+
European wheat against American wheat. You did not choose a view on EUR/USD,
|
|
235
|
+
and on a 30,000 t position the currency move can take a large share of a
|
|
236
|
+
correct spread call — in episode 16's worked example, €166,800 out of a
|
|
237
|
+
€457,800 wheat profit. The FX leg is a risk you inherited rather than one
|
|
238
|
+
you selected, which is the whole distinction worth carrying.
|
|
239
|
+
|
|
240
|
+
A4. It can ration demand, and nothing else on the supply side. Above ethanol
|
|
241
|
+
parity the switch is already spent: every mill with the flexibility to make
|
|
242
|
+
sugar rather than hydrous is already making sugar, so a higher screen pulls
|
|
243
|
+
no additional Brazilian tonnes into the sugar pool this season. What a rally
|
|
244
|
+
can still do is price marginal buyers out — delay purchases, encourage
|
|
245
|
+
substitution, draw on destination stocks — and pull cane forward from next
|
|
246
|
+
season only to the extent the crush calendar allows. This is why the shape
|
|
247
|
+
of the supply response matters more than its direction: the same five cents
|
|
248
|
+
that would have bought tonnes at 13 buys only demand destruction at 17½.
|
|
249
|
+
|
|
250
|
+
A5 — conversion drill. One metric tonne is 1.102 short tons, so a price per
|
|
251
|
+
short ton becomes a price per tonne by adding about ten percent.
|
|
252
|
+
|
|
253
|
+
Mental route: $355.10 → 355 + 35.5 = $390.50/t. Exact: 355.10 × 1.102 =
|
|
254
|
+
$391.32/t.
|
|
255
|
+
|
|
256
|
+
The reason this one matters is that Chicago soybean meal is the odd contract
|
|
257
|
+
out — it trades in short tons while the physical meal trade quotes metric.
|
|
258
|
+
Forgetting costs you ten percent, and ten percent of a meal cargo is not a
|
|
259
|
+
rounding error.
|
|
260
|
+
|
|
261
|
+
|
|
262
|
+
THE EPISODE, IN WRITING
|
|
263
|
+
=======================
|
|
264
|
+
|
|
265
|
+
|
|
266
|
+
|
|
267
|
+
You are long 30,000 t of physical corn. That is 1,181,040 bushels, or 236
|
|
268
|
+
lots at 5,000 bushels a lot. It is unpriced and unhedged, the board is at
|
|
269
|
+
536.75, and there is a WASDE on Friday.
|
|
270
|
+
|
|
271
|
+
The textbook answer is to sell futures. Kill the flat price, keep the basis
|
|
272
|
+
— the whole argument of episode 2. But suppose you do not want to kill it.
|
|
273
|
+
You think Friday's number is friendly and you would like to own the outcome
|
|
274
|
+
if you are right.
|
|
275
|
+
|
|
276
|
+
The next textbook answer is to buy a put. And this is precisely where a
|
|
277
|
+
hedging desk does not stop, because a put into a scheduled report is
|
|
278
|
+
expensive in a specific and knowable way.
|
|
279
|
+
|
|
280
|
+
So they build a fence.
|
|
281
|
+
|
|
282
|
+
Leg Strike Premium
|
|
283
|
+
---------------------------
|
|
284
|
+
Buy put 520 −18 c/bu
|
|
285
|
+
Sell call 560 +17 c/bu
|
|
286
|
+
Net −1 c/bu
|
|
287
|
+
|
|
288
|
+
One cent a bushel, or $11,810 on the position. In exchange, the flat price
|
|
289
|
+
is bounded. Below 519 you cannot lose any more; above 559 you cannot make
|
|
290
|
+
any more. Both figures are the strike adjusted by the penny of net premium.
|
|
291
|
+
Forty cents of band for a penny.
|
|
292
|
+
|
|
293
|
+
[chart] What the fence does to the P&L — The fence trades the tails for a
|
|
294
|
+
band. Below 519 the loss stops at $209,635; above 559 the gain stops
|
|
295
|
+
at $262,781. Everything outside those two levels belongs to somebody
|
|
296
|
+
else now. — Worked example, episode 17 — 30,000 t of corn, 520 put /
|
|
297
|
+
560 call at 1c net debit — https://storage.googleapis.com/podcast-
|
|
298
|
+
audio-2647223968/commodity-desk-daily/ep17_chart2.png
|
|
299
|
+
|
|
300
|
+
The yield is raised and corn breaks to 495. The physical loses $493,084. The
|
|
301
|
+
520 put pays 25 cents of intrinsic, or $295,260. After the penny of premium
|
|
302
|
+
you are down $209,635 — and that is the worst it gets. At 470 it is the same
|
|
303
|
+
number. At 450 it is still the same number.
|
|
304
|
+
|
|
305
|
+
The yield is cut three bushels and corn runs to 585. The physical makes
|
|
306
|
+
$569,852. The 560 call you sold costs you $295,260 of intrinsic. You keep
|
|
307
|
+
$262,781, and that is the best it gets.
|
|
308
|
+
|
|
309
|
+
[chart] Where the upside goes at 585 — On the friendly print you keep 46
|
|
310
|
+
percent of what the physical made. The call you sold is not a fee —
|
|
311
|
+
it is the good outcome, sold in advance. — Worked example, episode
|
|
312
|
+
17 — https://storage.googleapis.com/podcast-
|
|
313
|
+
audio-2647223968/commodity-desk-daily/ep17_chart3.png
|
|
314
|
+
|
|
315
|
+
The number lands exactly on the estimate and corn opens unchanged. This is
|
|
316
|
+
the scenario worth the episode, because on a flat board most people assume
|
|
317
|
+
nothing happened.
|
|
318
|
+
|
|
319
|
+
Something happened. The implied volatility in both options was carrying
|
|
320
|
+
Friday's event, and Friday is now behind them. Implied volatility falls, and
|
|
321
|
+
both options are marked lower on Monday than they were on Thursday with the
|
|
322
|
+
future in the same place.
|
|
323
|
+
|
|
324
|
+
Had you bought the put alone, that is a straight loss on an unchanged
|
|
325
|
+
market. In the fence, the call you sold was carrying the same event premium,
|
|
326
|
+
in roughly the same amount. It gets crushed too, and you are short it. The
|
|
327
|
+
two effects largely cancel.
|
|
328
|
+
|
|
329
|
+
That is the real reason a hedging desk fences rather than buying puts. Not
|
|
330
|
+
that the put is expensive in an absolute sense. That the fence is close to
|
|
331
|
+
flat on volatility while a bought put is emphatically long it. A hedger
|
|
332
|
+
wants protection. A hedger does not want a position in how frightened the
|
|
333
|
+
market will be next Tuesday, because that is a second view, and it is a view
|
|
334
|
+
they have no edge in.
|
|
335
|
+
|
|
336
|
+
The instinct carried over from equity index options is that puts are
|
|
337
|
+
expensive because crashes are downside. Grains invert it.
|
|
338
|
+
|
|
339
|
+
A corn crop can fail. It cannot over-succeed by the same magnitude. Supply
|
|
340
|
+
shocks push the price up, so the fat tail is a rally, and out-of-the-money
|
|
341
|
+
calls generally carry higher implied volatility than equidistant puts.
|
|
342
|
+
Selling the 560 call to fund the 520 put is therefore selling the dear wing,
|
|
343
|
+
not the cheap one, which is exactly why a penny buys forty cents of band.
|
|
344
|
+
|
|
345
|
+
Skew is also information, and it is one of the cleaner reads available. When
|
|
346
|
+
call volatility trades well over put volatility, somebody is paying up for
|
|
347
|
+
upside protection. It is not the farmer — the farmer's fear is a lower
|
|
348
|
+
price. It is the consumer and the short: the feeder who has to buy, the
|
|
349
|
+
exporter who has sold cargo they have not bought, the fund that is short
|
|
350
|
+
into a weather market. Read that way, skew tells you the shape of the fear
|
|
351
|
+
in the market, not merely its level.
|
|
352
|
+
|
|
353
|
+
Every hedger who sells a call says the same sentence to themselves, and the
|
|
354
|
+
sentence is always some version of that strike is never getting touched.
|
|
355
|
+
|
|
356
|
+
Suppose it does. December corn at 620 in October, on a Black Sea escalation
|
|
357
|
+
that nobody had in the model.
|
|
358
|
+
|
|
359
|
+
Amount
|
|
360
|
+
------------------------------
|
|
361
|
+
Physical gain at 620 $983,216
|
|
362
|
+
Fence caps you at $262,781
|
|
363
|
+
Handed back $720,435
|
|
364
|
+
|
|
365
|
+
Three-quarters of a million dollars of upside, given away for a penny. That
|
|
366
|
+
is the honest accounting of a "costless" collar, and it is why the word
|
|
367
|
+
costless does more damage than any other word in hedging.
|
|
368
|
+
|
|
369
|
+
But the P&L is the smaller problem. The short call is a futures-style
|
|
370
|
+
position at the exchange, so it margins daily. The $720,435 goes out of the
|
|
371
|
+
account in variation margin as the market rallies — real cash, on a real
|
|
372
|
+
clock — while the physical gain sits unrealised until the corn is priced and
|
|
373
|
+
shipped. A perfectly correct hedge turns into a funding crisis. Episode 3
|
|
374
|
+
made this point about a plain futures hedge; a short option wing makes it
|
|
375
|
+
sharper, because the loss is unbounded on the side the market is actually
|
|
376
|
+
moving.
|
|
377
|
+
|
|
378
|
+
| TRADER: What do I pay for the 520 / 560 fence, December, 236 lots?
|
|
379
|
+
|
|
380
|
+
| BROKER: I make that a penny, you pay. Call side is bid well.
|
|
381
|
+
|
|
382
|
+
| TRADER: And if I move the call to 570?
|
|
383
|
+
|
|
384
|
+
| BROKER: Then you are paying five and a half. You are buying back the
|
|
385
|
+
| bit you actually want.
|
|
386
|
+
|
|
387
|
+
Two things in that exchange. First, neither party quotes a volatility — the
|
|
388
|
+
fence trades as a single net premium in cents, because that is the number
|
|
389
|
+
the hedger's committee approves. Second, and more important, the broker's
|
|
390
|
+
last line is the whole trade in nine words. Moving the call strike up by ten
|
|
391
|
+
cents costs four and a half cents of premium, because you are repurchasing
|
|
392
|
+
the upside you had sold. The fence is not free protection. It is a trade in
|
|
393
|
+
which you fund the bad outcome by selling the good one, and the closer the
|
|
394
|
+
sold strike sits to where you think the market is going, the more it pays
|
|
395
|
+
and the more it hurts.
|
|
396
|
+
|
|
397
|
+
|
|
398
|
+
----------------------------------------------------------------------------
|
|
399
|
+
Soft Commodity Trading — a daily briefing on physical commodity trading.
|
|
400
|
+
|
|
401
|
+
GLOSSARY
|
|
402
|
+
Every unit and expression the show has introduced lives on the episode page:
|
|
403
|
+
https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/ep17.html#glossary
|
|
404
|
+
|
|
405
|
+
All episodes: https://storage.googleapis.com/podcast-audio-2647223968/index.html
|
|
406
|
+
RSS: https://storage.googleapis.com/podcast-audio-2647223968/commodity-desk-daily/feed.xml
|