Paul Skarp ATG Marketplex Phone:973-614-1000 E-Mail: pskarp@aarontrade.com

Paul Skarp entered the commodity futures industry in 1996 as a runner on the COMEX and has gained experience in all aspects of the business since his introduction. After having worked in the capacity of an options point clerk Mr. Skarp went on to spent many years working with other market professionals to develop proprietary trading models, algorithms and techniques for almost every type of trader, individual and commercial alike. In addition to online webinar, he also holds several live seminars at various locations throughout the year. Currently he publishes two newsletters, Contagious Greed and The Naked Greek. Mr. Skarp is a principle of ATG Marketplex, a commodity futures and forex broker.

Soybean Volatility Slopes and Seasonal Weakness
July 6, 2009

Much can be said about a bullish long-term outlook for global cereal grain and soybean markets. You may even take Jim Rodgers literally and go learn how to drive a tractor in your spare time or move to the Netherlands. All joking aside though this time of year soybean prices have traditionally come under pressure in the past.

In the article below I have identified an option trading idea on how you can utilize high implied volatility and possible seasonal price weakness to setup a trade that not only has a high probability of success but can be profitable over a wide range of prices.

In the chart above implied volatility, while off its peak high, is still "high" in contrast to the past two years. Therefore, our first step in constructing a possible option trade is to utilize spread strategies that are designed to take advantage of high implied volatility.

The chart above shows the soybean implied volatility call slope. For those that aren't familiar with this concept a call slope is simply a way to demonstrate all of the implied volatilities for each call strike price. Typically, after a market makes a large sustained move to the upside the call slope will become very steep. For example, in markets such as coffee implied volatility for out-of-the money call options can trade as much as double as the at-the-money calls during big bull moves, especially during freeze driven bull markets. Situations such as this can provide exceptional opportunities for option spread trading.

The 10 and 15 year seasonal averages, as identified in the chart above, show possible price weakness until October. To take full advantage of the high implied volatility, the call slope as well as potential seasonal price weakness in the marketplace I have labeled the chart above with one possible 1x2 ratio bull call spread.

Characteristics of this option trade at expiration:

1. November Soybeans $0.00 - $11.60: Spread would expire worthless and we would keep the credit received of $525.00.



2. November Soybeans $11.60 to $12.60: We would keep the credit received of $525.00 and we would also witness additional profit in this range due to our long 1160 call. The maximum profit on this spread would be $5,525.00. For this to take place the market would have to be trading at $12.60 at expiration.



3. November Soybeans $12.60 to $13.60: As prices move above $12.60 our profit would diminish. Our breakeven on this trade at expiration is $13.70.



4. As prices move about the $13.70 level this trade would witness a loss.

In closing, ratio bull call spreads can offer opportunities whereby you not only have a trade that is profitable over a wide range of prices but also has a high probability of yielding some profit. Even if it is only the credit received for initiating the spread.

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Disclaimer: There is a risk of loss in trading commodity futures, spot foreign exchange and options markets.