Clearly, tariffs have been the story of every market as traders saw the headlines several days ago about 25% tariffs on Canada and Mexico and 10% tariffs on China. While many in the market are still trying to sort through how permanent these tariffs may be, what the retaliation might be and what the first and second order effects are, the first thing that comes to mind is that U.S. agricultural products may bear the brunt of the retaliation. With very positive terms of trade globally in agriculture, these markets could be at risk. According to USDA data, China, Mexico and Canada accounted for $89.8bb of the $178.7bb of U.S. ag exports or 50.3%. This presents a large risk. With the highest tariffs on Canada and Mexico, it is worth considering what the U.S. exports to these countries are. The chart above shows the composition of the exports to Mexico with corn and soybeans. For Canada, the exports are more fruit, cereals and ethanol. While the tariffs have been suspended for a month as of February 3, traders might want to consider that markets have not heard the last of this public negotiation.

With this news in the market, it is worth turning to the technical charts to see if there is any impact so far and what could happen going forward. One can barely see much reaction in the markets given the news and the suspension was so abrupt. Looking at a daily chart over the last year, it is clear that on the back of positive news in the November and December WASDE reports, Corn has broken out above all major moving averages. These averages have also turned higher, and Corn looks to be in a developing bullish pattern. For Soybeans, the story is a little different. As I have highlighted a few times over the last few reports, Soybeans have been lagging this breakout move in Corn. That said, after the December report, Soybeans did turn higher. However, I can see futures prices running into potentially heavy resistance at the one-year moving average. Referring back to Corn, I can see the one-year moving average provided resistance throughout October and November before futures finally broke out. With potential negative news, is this a catalyst for either market?

Given the news in the market and important USDA reports, key strategies involve the entry and exit of positions. Trading windows have been compressed in the current trading environment. The rise of short-term options provides traders with defined risk in short windows and strong risk-reward profiles. CME Group recently listed Monday – Thursday Weekly options, extending the existing Friday Weekly listing. This new offering gives traders an option expiring every trading day, along with more refined strike listings. In this past February's WASDE report, over 2,400 mid-week options traded, primarily in the Corn market.

Turning to trader positioning, I can look to the Commitment of Traders report for Managed Money and see how traders are positioned in both Corn and Soybeans. The top chart shows the length in Corn for traders. I have widened the Corn report out to show all of the data available to demonstrate that the length in Corn right now is at the highest levels it ever tends to hit, seen last in 2020/2021 and before that in 2011. Not only is Managed Money long, but it is also as long as it ever gets. For soybeans, Managed Money has turned long but only barely so. This is a big change over where Managed Money was for all of 2024 though, as it ran short Soybeans all year, only going long in the past month. On the one hand, the length in Corn suggests some risk given the magnitude. On the other hand, Soybean longs may be “weaker hands” so this has only happened in the past month or so. Long positioning presents a potential catalyst to both Corn and Soybean markets.

The next step for me is to understand the volatility markets for both Corn and Soybeans. For this, it is great to be able to use the CME Group CVOL indexes. The top chart shows the CVOL Index for both Corn and Soybeans over the history of CVOL. It shows that, while not at the all-time lows, it is much closer to the lowest levels than the highest levels. Narrowing in over the last year with the bottom chart, I see CVOL bottom in early December and has been moving higher post the December holiday season. Even though the volatility markets have moved higher in the last month, one can see that the levels are still historically near the low side.

Another step for me is to not only think about implied volatility relative to its own history but also to compare implied volatility relative to realized volatility. This will indicate the traders’ ability to cover the daily time decay if delta hedging their position, or to potentially achieve breakeven levels too. The top chart shows the one-month implied and realized volatility for Soybeans and the bottom chart shows the same for Corn. In each case, one can see that implied and realized volatility are essentially the same, suggesting that an astute trader can cover their daily time decay and implied volatility is roughly fairly priced. Given implied volatility often trades at a premium to realized, and given there may be many potential headlines, this seems to be a potentially attractive set up.

Putting this all together, it seems the headlines in this administration will keep coming. In just the first couple weeks of the new administration, the headlines are often difficult to keep up with. The tariff news was particularly impactful as the agricultural markets are the most likely to see retaliation, particularly as tariffs were focused on the U.S.’s largest agricultural partners. While the Canada and Mexico tariffs were suspended a month until early March, there is reason to think there may be some clarity before that depending on how negotiations are proceeding. In addition, there is a budget battle in Congress around government funding and this has a deadline of March 14. Tariffs may well play a part in trying to get certain other parts of the budget funded, thus, it is not unreasonable to think there will be more market-moving news in the coming weeks. Of course, the WASDE report on February 11 was another catalyst.

Combine all of this with historically long Corn positioning and potentially weak Soybean longs and the headlines could create a catalyst for position movement. Corn is in a solid technical trend, but Soybeans are running up against resistance right now. Implied volatility looks reasonably priced both relative to its own history and relative to realized volatility. Expressing a long volatility view looks quite interesting. I have chosen a contract that will cover many of the potential catalysts, with the ZS4G5 1070-1080 strangle. This expires on Friday, February 28, covering many catalysts and expecting to catch movement in the likelihood there is news on tariffs or budgets before the deadline. The nice thing about the CME Group contracts is not only is there a Friday contract, but as of this week, there are Monday through Thursday contracts as well. Thus, traders can tailor-make their trade to the exact catalyst they think is the most important. I am just giving a more generic example.

There are a couple of ways to handle this strangle around WASDE and other catalysts. First, the break-evens of it are 1038 and 1112. If there is a move that is large enough in either direction, the trader can profit by moving outside of the break-even levels. Another way to profit would be if a trader wants to buy the strangle and delta hedge it, rebalancing the delta of the position, which is initially delta neutral, every time a long or short delta position accumulates from movement due to catalysts such as WASDE or headlines or even simply technical breakdowns or breakouts. It is initially a position with no directional view, only a view that volatility will go higher. However, as the move develops, a trader can let the position turn into more of a directional view by playing for break-even levels, or to maintain no directional bias but a volatility bias by delta hedging. There is a lot of flexibility in how to risk-manage the position. The loss is, of course, the premium spent and there is a daily time decay particularly because it is a shorter-dated expiration. Thus, a trader wants movement sooner than later.

Volatility can be the friend of a trader, and strangle positions can be a way to express that volatility view. The CME Group tools help a trader identify the optimal way to express that view.

Good luck trading.

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