RISK REVERSAL AND ADJUSTMENT
When the news headlines were screaming: "There was fear of a drought, and no end of the rally in sight!" The Contrarian in us instinctively thought SELL!
“The deficits are so great that it will take up to 10 or 15 inches of rain over a longer period of time to replenish soil moisture supplies,” Andy Karst, meteorologist for World Weather Inc., said in the Reuters article.
"Without a doubt, states in the Corn Belt and Great Plains are facing one of the worst droughts on record. But its full effects won’t be known until harvest time, and it could end up having real implications for your ETF portfolio.
The drought has sent a few corn, grain and biofuels ETPs on a meteoric rise over the past three months, and with conditions expected to persist, the worst of the drought may still be ahead." (yahoo finance 8/27)
"...Grim Forecasting
Adding to the already-painful U.S. Department of Agriculture report, the PFA forecast an even grimmer yield for 2012 crops. The report forecasts a 2012 crop yield 19 percent lower than last year’s harvest and 21 percent below the 2010 harvest. (IBID)
This is a 20x Risk Reversal, think of it as simply a credit and debit spread combined to reduce over all cost.
NET NET the position cost $0.10 cents or $10.00 x 20 or $200.00 to enter.
The risk graph of this position looks like the following:
I view the risk in basically Three simple parts,
To the downside we can make a total of $3800.00 We want 48 or lower
in the middle we are risking our cost of entry, or $200.00 This is between 48-55
on the upside we start to aggressively give back to the max of $4200.00 This is between 55-57 where we are maxed out
since we have been in this position this is what corn has done on a daily chart.
NOTE WE ENTERED ON 08/20 when the underlying was trading at approx $51.00 give or take.
Since then, things have agreed with us.
But we would like to make and adjustment here, and we did.
This is a simple 10x vertical BOT at $0.30 debit or and additional $300.00 capital outlay, and below is our current risk adjustment.
Typically we would just just Bot the Sold 55 Calls back and be done with it, That would give us our margin back, and we could play with the the remaining vertical- Which is more active and closer to the money- (AKA more chances of actually filling)
But after watching us sit on bid at .05 for days with no fill on our 55 line, (Me being the only BID IN SIGHT)
let alone the 54 Calls at ZERO BID-
I am tried of watching this thing- and I want to snap some of the risk out,- so I can move on to more pressing issues. this helps me mentally let things go. I am constantly trying to pull risk in, and it helps lighten the load throughout the life of the trade, although not always the most intelligent of moves.
Mental fatigue from sitting and starring at something that barely trades, it can almost at times be the slow water torture that is as exhausting as getting run over by a mover without the excitement.
After The Adjustment
Downside Previously +$3800.00 Now +3500.00 profit potential.
Middle previously -$200 (7 pts wide) Now -$500 (2.50 pts wide)
(NEWLY CREATED ZONE) 50.50- 55.50 (approx 5 pts wide) = +$1500.00 potential.
Upside risk previously -$4200.00 Now -$2500.00 MAX RISK.
September 26, 2012
FILLED
CLOSED
BOT 20x 46 @ $0.76 Debit
Sold 20x 48 @ $1.81 Credit AKA 1.05 Credit
Currently P/L
HOLDING THE FOLLOWING
DRAFT TO BE COMPLETED> JEDI in TRAINING
