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August 9, 2012 / redman59

Speculation Play in Corn with $MOS

As other demands took place I was not able to get this post out before the close but I believe it may still be useful going forward. Corn prices have been the hype as we have seen a spectacular move in corn. I wanted to get this out before the close as we have the USDA Crop Report to be released at 8:30 EST. TO get more information on the report and expectations please read “U.S. corn hits record on eve of key USDA crop report“.

I personally am looking for corn to drop from current levels. The easy way to play for a drop would be to short the ETF CORN or buy put options. The problem that I see with CORN options are that they don’t seem to have the open interest I like and that the overall volatility is high (IV compared to prior IV).

Whenever I look at agriculture commodities I also think of the agriculture-chemical group. The way that I plan to play a drop in CORN is to put on a strangle play in MOS (Mosaic Co). There are several reasons why I prefer MOS here:

1) Long term correlation (measured by 60 days) to CORN remains relatively high, often above 75% and currently 95.7%
2) IV is at its lowest of its 180 day range (positive vega position will benefit on IV Rise)
3) Consolidating in a tight range (around 5%) after a +32% run off its early June lows

From the chart you can see that I have 60 labeled as a resistance area. As stated, I am looking for corn prices to drop thus bringing pressure to MOS as well. But in the event that I am wrong and corn prices continue to rise, I can see MOS breaking through this 60 level and continuing another leg first targeting 62 (another resistance area). MOS has been consolidating for just under a month now so I believe the time for it to make a next move is near.

September expiration is 42 days away so I believe that expiration provides the best opportunity for cost efficiency and timing. I plan on playing the MOS Sept 60/57.5 Strangle for a debit of 3.08. Risk profile shown below.

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