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Is it time to load up on Long Calls on CORN?

Drought corn
Drought corn (Photo credit: CraneStation)

The extended draught this year has had a devastating effect on corn crops. Photos have blasted the internet showing silos that are full of air and very little corn.

How will this impact people in the months to come? I expect that the prices of all things that include corn will continue to escalate in price. Can companies shoulder the added expenses, or will this impact the financial sheets.

As a serious investor I see quarterly earnings events as times of big impact on the share price of the company’s publicly traded stock. Knowing that corn supply will be very short for the coming months, what could you do to enjoy a profit on this fact? If I was an experienced Futures trader, I’d investigate corn specifically. However, since my experience and focus has been on equities, I’d investigate the impact on companies in the Food/Beverage Sector with strong needs for corn products.

All successful investors have a strong habit of completing a fundamental analysis of companies they’re interested in trading. Through this activity comes the answer to the big question: “How much does this company depend on corn or corn by-products to succeed in their own business?”

One of the best benefits of knowing how to use options as trading instruments is their leverage effect. Options can limit the risk in any investment as long as the options’ behavior is understood. In fact, one could expect to spend less than 10% of the share price and still profit from a bearish move down. Long Puts give an investor the Right to Sell the equity at the strike price during a defined time. One put contract controls 100 shares of the equity. If XYZ is now trading at a share price of $38.50, an investor would need to have enough money in their account to cover their risk of Shorting the Stock. Shorting 100 shares would require $3,850.00 (or less if they have been approved by their broker to use Margin.) Furthermore, retirement accounts prohibit such activity. However, if they buy a Long Put, October 38, how much capital would they need? About 10% or less. One October contract put would give the put buyer the right to sell for the next 60 plus days. As in all profits, we look to buy low and sell high. With long puts we are able to sell high first, and then as the equity price drops the value of the long put increases, generating a profit.

Options are powerful investment tools. And, like everything else in the market place, their values are based on supply and demand.

Emilu Bailes
OptionsANIMAL Instructor

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