For the last few months, I have written this report with an eye toward WASDE being the major catalyst. While it is surely a catalyst, given the end of the growing season is approaching and  markets may be impacted more by other catalysts, I thought I might focus on something else. 

Since early November, financial markets around the world have been struggling with the idea of what another Trump administration will mean for them. The concern or expectations of tariffs being levied on certain countries or products, with a commensurate level of potential retaliation from those countries affected, has been an important part of the discourse post election. Within the equity markets, some investment banks have put together baskets of stocks that are meant to represent those names most impacted. In the chart above, the white line is such a basket, considering those names in the U.S. stock market that the imposition of tariffs hurts mostly because of their large import numbers from China as a key source of their manufacturing. You can see above that many of the grain markets have somewhat followed this basket over the last six months as there are concerns that China would retaliate against the U.S. in large part by reducing the grains it buys from the U.S. 

Corn has had the least impact on its price over the last month or so. However, soybeans, which have a large export expectation to China, and wheat, which exports a lot to Mexico, also rumored to be a target of tariffs, remain at very subdued prices weighed down by these concerns. In the last few days, the basket of stocks has shot higher. The rumor and then appointment of Scott Bessent as Treasury Secretary has put some investors at ease that perhaps the worst-case scenario of tariffs wouldn't be realized. While ‌stocks have rallied, soybeans and wheat aren't moving at all. Is this an opportunity?

Digging into those price moves a little more closely, I turn to the Ichimoku charts for generic front-month Corn, Soybeans and Wheat. The top chart shows Corn, and you can see from it that the price of Corn hasn't only broken above the ichimoku cloud, but the lagging span has also moved above the cloud and the entire cloud is shifting higher. This suggests a trend change in Corn that's been developing for a long time. It may be difficult for traders to sense this, given the relentless decline in Corn for most of the year, but the product is ending the year on a high note. 

However, this positive tone isn't the case for Soybeans or Wheat. The middle chart shows Soybeans, and one can see that while it tried to break out, and I anticipated a potential breakout last month, price was rejected at the upper end of the cloud, and it's turned lower. The cloud itself is flat looking forward, suggesting no apparent directional bias. This is also the case for wheat in the bottom chart. Price actually broke above the cloud in September and October, but since that time, it's fallen back below and is beginning to look weak. That said, the cloud direction is pretty flat, suggesting a market still in flux and looking for a possible direction.

As traders approach the end of the year, I thought it made sense to look at the seasonal patterns for each of the front-month contracts. One can see in the top chart that Corn seasonally has a strong December after a weak November. That information is on the top line of the chart. Just below that is the performance on a month-to-month basis this year. While November is seasonally negative (and I was relying on that last month), Corn actually had very positive returns this November, delivering over 3% returns vs. a typical -1.76%. Does that suggest there's little gas in the tank left for Corn? ‌This isn't the case for Soybeans or Wheat. Soybeans returns are quite positive on average in November and December. Returns this past November were positive, but barely so. Thus, there's a case to be made for a strong December end to the year for Soybeans. The case for a December bounce is even more compelling looking at the seasonal pattern for Wheat. While returns are typically -1.66% on average, in November, wheat prices were actually down 6%. Prices are typically positive in December, and there's a lot of room to make up. The seasonal pattern may be most favorable for Wheat, followed by Soybeans, with not much upside expected from a seasonal standpoint, for Corn.

When one looks at traders positioning for Corn, Soybeans and Wheat in the Commitment of Traders report, there's probably little surprise. Across the three products, managed money is pretty flat, per these charts. However, there's a clear preference within the products, as managed money is long Corn and short both Soybeans and Wheat. Given the price action seen in the charts, this may not be a surprise. Is there scope for adding to positioning given it's flat across the three products? There may be some sense of playing relative value right now given the uncertainty in the markets. If this uncertainty begins to resolve, combined with some strong seasonal patterns, is there scope for shorts in Soybeans and Wheat to be reduced, raising the overall length? This may seem far-fetched to traders who have watched a seemingly relentless decline in the three this year. Perhaps markets are on the cusp of a reversion to the mean, however, with catalysts on the horizon.

Are traders pricing in much volatility for the December WASDE? As I have shown in some previous reports, the best place to answer this question is the Event Volatility Calculator.  The top chart shows the calculation for Corn. You can see that the market is pricing in a volatility of 24% for corn on December 10, versus a steady-state implied volatility of 16%, or a 50% increase in volatility from WASDE. Looking at Soybeans and Wheat, it's a very different story. In the middle panel, one can see from the Event Volatility Calculator that no incremental volatility is found around the December 10 event. This is somewhat surprising given the importance of the catalyst, but perhaps speaks to how trade and tariffs may be a bigger driver for Soybeans. A somewhat similar pattern is true in Wheat. While some event volatility is observed, the implied volatility for WASDE is seen to be 16.5%, well below the 25% that's priced in across the rest of the Wheat options curve. Thus, volatility, but less than expected. All eggs for WASDE are really in the Corn basket, with little expected in Soybeans or Wheat.

I can see what's priced into the WASDE event, but how does volatility in general look for these three products? The top shows the aggregate for all Agricultural products, and I can see really across the board, CVOL measured volatility is near the lows of the last year. This is especially the case for Corn, Soybeans and Wheat not only on an absolute basis but also relative to the other Agricultural products. The middle panel shows CVOL for each of the three relative to each other and relative to their own history. ‌I can again see that each are at or near the low of the year. Volatility overall looks low. Combining this with the Event Volatility Calculator, while corn looks like a lot of volatility is priced into WASDE relative to other options around that date, the overall level of volatility is quite low, so I'm less inclined to want to sell this event volatility. On the other hand, not only is little or no volatility priced into the WASDE catalyst for Soybeans or Wheat, but their CVOL is at or near the low of the year, suggesting that ideas that can get long event volatility, and volatility in general may make sense. 

The last chart at the bottom shows the Skew Ratio for each product. I can see each product shows the Skew Ratio ticking higher in the last month, suggesting a greater demand for upside options than downside options for each product. This is something I think I can use in a trade idea as well.

Combining this information, I look at a Wheat call calendar spread. I have looked at slightly out-of-the-money calls because the Skew is favoring the upside and I want to sell calls where the volatility is higher. The idea here is that I sell an option expiring before the WASDE report, the ZS1Z4 1010 call, and buy an option expiring after the ZS2Z4 1010 call. I've decided to use the same strike and make it a pure calendar vs. a diagonal because I don’t mind being long some gamma and vega given the level of CVOL.  I also look at this trade for Soybeans, and it can be done, however, I just felt that it was more attractive for Wheat. Additionally, I am going to work under the assumption that if there is positive news on tariffs, the assumption of which has lifted equities but not grains, it may be in relation to Mexico and less likely China, because the latter is more difficult. However, one could consider a similar idea in soybeans. 

With a calendar spread, I can see from the top chart the expected return of the spread. This expected return takes me up to the expiration of the first option. Let’s think through three scenarios of what could happen before WASDE. First, wheat continues to move lower. In this case, the call you sell expires worthless and you're left long an upside call for WASDE, however it's out of the money. You may be able to sell this call and recoup some premium, but probably not all of the premium you spent. Given you are getting long at a low volatility, your risk is somewhat muted on this and is a lot less than if you bought a call outright to play a directional move higher from WASDE. The second scenario is that there is positive news and Wheat futures move a lot higher. In this case, both the option you sold and the option you bought are deep in the money. Both will be assigned/exercised. Since the strikes are the same, you don’t lose anything on intrinsic value (parity) but you will lose the premium paid. This isn't much but is a worse outcome than if you bought calls outright spending more premium, so the call calendar has much lower risk. The final scenario is the most interesting. This is the one where futures don’t really move much in either direction between now and WASDE. The call you sell expires worthless. You're left long a slightly out-of-the-money call that covers the WASDE event at a very attractive price. The possibility of this outcome is what makes calendars so attractive. 

Managing this position can be somewhat tricky. In order to help you think about it, I have also attached the graph of the delta of this spread. You can see there's initially a small positive delta as the further expiration has a higher delta on the out-of-the-money call. As futures move lower, the delta of this spread moves to zero, suggesting a lower probability of either ending in the money. You can also see that this positive delta moves to zero as futures approach the strike. In fact, as futures move a lot higher, the delta goes negative because the near date option delta will approach 100 faster than the far date option. However, that option will eventually be 100 delta too, and the entire spread has no delta. The difficulty in managing comes when futures are near strike at expiration. If just below, the option goes out worthless and you're long a cheap at the money, as I mentioned. You can choose to hold onto these deltas, which are now 50 delta or look to reduce. If things end up slightly above strike, you'll get short 100 deltas from the short call getting exercised. You're long a ~50 delta call against this. So, you need to decide if you want this to be a directional play or a volatility play at that point, and make a delta adjustment. None of this is difficult if you plan ahead on how you want to manage this delta risk. 

Calendar trades can be a very interesting way for traders to implement their ideas. They become more attractive when the market is pricing in little to no incremental volatility for the event. In fact, in this case, traders think there'll be less volatility from WASDE, which may be an opportunity. Risk still needs to be managed, but if you can do so, there are good potential asymmetric returns available. 

Good luck trading!

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