Update On Corn Trade

I wrote yesterday about about buying a March Corn put option to take advantage of a possible drop in prices. This is an example of a kind of trade that I like to call the Contra Extreme Strategy. Basically, this strategy involves finding a market that TOVI indicates is either in an extreme strength rating, and then buying an option opposite of the major trend in order to catch a major correction.

For example, in December Corn, TOVI shows Corn in an uptrend with the strength of the uptrend as extreme. Corn has been in the uptrend 19 days and for the past 5 of those days, the strength of this uptrend has been Extreme.

Now, markets that are in these extreme trend ratings like Corn tend to have very powerful corrections or pullbacks. Corn’s correction is going to be to the downside so therefore I wanted to buy a put option as close to the money as I could afford.

By the way, I was able to enter a trade in Corn today. This morning, before the Corn market opened, I placed an open order to buy one March 2007 300 put for 11 cents or better. That means, the most I was willing to spend on the option was $550. One cent in Corn equals $50, so 11 x $50 = $550. I didn’t think that I was going to get filled today as March Corn opened lower today and the 300 puts were already more expensive than $550. But, later in the day the price of Corn eased back up and so my order was filled at 11 cents or $550.

Had the order not been filled today, I would have probably watched a couple of trading days to watch the price action and if the order still wasn’t filled, then I would have reevaluated the trade, that is, either cancelled the order and placed a new order with maybe another option or used another entry price with the same option.

Anyway, my order was filled and by the end of trading today my option had a value of 11.5 cents or $575, a profit of $25 before commissions and fees.

Of course, every trade should be conducted according to a plan. My plan is to liquidate the option when the price hits one of the price targets that I wrote about yesterday, or liquidate by December 18, 2006, whichever occurs first.

There are several other markets right now where the Contra Extreme strategy could be rather profitable. I’ll be detailing some of those in future updates.

For more information on the basics of commodity and commodity options trading, please visit my web site at www.mylearn2trade.com.