10/23/2013 Wed

Wheat Futures    Mar futures closed yesterday 709.75    ZWH4

* front month is still Dec Futures which are at a 10 point differential

IV                    JAN 21.80%        Mar 22.75%

      The grains have been hit hard over the past year and a half. Wheat sold off from a high of 945, bottoming at around 621. It has been strong over the last several weeks rallying through the 700 handle. To me it looks like short covering could push the futures up through the 800 handle which is just over the 50% retracement from the move down from 945.

      Look at buying the Jan call contracts on any weakness. The best play to me is in the Jan or Mar options. In Jan look at the 750/790 call vertical +1/-1 for 7 points or better, which is a risk of $300 with a potential gain of $1,700 it is currently trading around 7.50.

      The other choice would be the Mar 750/790/830 call Butterfly +1/-2/+1 for 3.50 or better but at the current price it’s trading for of 3.50 which is a risk of $175. The risk reward is attractive $175/ $1,825. The difference in the 2 spreads is time and how fast the move occurs. The Butterfly’s have a tendency not to pay off further out from expiration  they are but one can still take some excellent profits none the less should the move up continue.

      With the forecasts pointing to a harshly cold winter here it’s a good percentage play in either case. If the cost of the Jan spread is too pricey, look at the 750/790/830 +1/-2/+1 Butterfly same strikes as in the Mar spread. The Jan Butterfly is trading around 4.00.