On June 10th, Bespoke Institutional subscribers received a trade idea as a part of our nightly report, The Closer. The report outlined a unique set-up in agricultural commodities, including corn, wheat, and soybeans, and it is available here. Below is a run-down of the trade and how it worked out.
With the help of our colleagues over at Bespoke Weather, we identified a large possibility of El Nino introducing supply disruptions for global agricultural markets. Furthermore, our analysis of CFTC data identified a large short position among speculators that could be ripe for a reversal. Finally, after declining steadily for over a year, the DBA ETF (which tracks a broad spectrum of agricultural commodities) had been moving sideways for almost three months in a broad basing pattern. Our view was that the combination of weather, positioning, and technicals created an asymmetric risk-reward scenario despite bearish supply factors and horrible YTD returns for ags.
To take advantage of the set up, we recommended Bespoke clients consider a call option on DBA, specifically a $23 strike expiring October 16th. The call traded with a delta of about 40, giving large exposure to upside with a low premium outlay ($0.60 at the time we published our original report) and capped downside. While the call lost about half its value in the days following our report, patient holders retained the upside into an explosive move higher in DBA over the past week and a half. After closing at $22.05 on June 10th, DBA sits at $23.28 today, in the midst of a definitive breakout above its consolidation range. The calls now trade $0.85 bid versus $1.00 offer, with trades getting done around $0.94 cents today: a gain of 57% off of our entry price. The move has been driven by a combination of positioning reversal and less bearish stock data for grains. In our update to clients on Tuesday (available on page 2 here), we recommended holding the calls in anticipation of further appreciation for DBA.
Other recent Bespoke options trades have included structures based on short-term Treasury market volatility, the high yield bond market, USD reactions to FOMC decisions and economic data, and equity index relative value. If you’re interested in cross-asset options strategies, Bespoke Institutional has you covered. Options trade ideas are only one of the many subjects covered in the huge suite of reports available to Bespoke Institutional subscribers. Other analysis topics include the domestic US economy, country-specific and global international economic developments, fundamental and technical evaluations of multiple asset classes, and updates on emerging or ongoing themes. Consider a trial or subscription for your team as a source for trade ideas or a way to keep a pulse on global markets that include not only US equities but a broader swathe of global asset markets.