Wheat Might Make Some Bread - Update 10

This time its different. Meaning today's candle went all the way down to the bottom Trend Line and closed far from the 8ema. The past 5 days were more neutral, but today is clearly Bearish. So now, I have to do something about it. Either exit the trade or find a way to hedge it.

The thing is, we could be about ready to break out of this Bullish Flag pattern to the upside. The BB/KC Squeeze is still working and we have no sign of breaking out of that yet, but when we do, we can see a large move. If we break to the downside, we'll definitely hit our Stop which would be a sizable loss. The Entry is 693 1/2 and the Stop is 639. So the loss would be (693.5-639)*$10/pt=$545, plus a similar loss on our parallel corn trade.

There are a number of different ways to take a hedge on this trade, including buying a Put Option or Put Option Spread, sell a Call Option or Call Option Spread, short another grain futures such as Soybeans, or use an appropriate ETF. I decided on buying a July Wheat Futures 660 Put Option for 15 1/8 points with an expiration date of 6/25/2021. The option is on a full size ZW Futures contract ($50/pt) not the YC mini ($10/pt). The cost was 15.125*$50=$756.25 with a Delta of .514.

Since the option underlying futures contract is 5x our long futures contract and the Delta is about 50%, we should see an increase in the value of the option that's 2.5% the change in the Wheat futures. Plus the Delta will increase if the futures continue downward. So, this one option should cover both our Wheat and Corn contracts.

Now there's the question of whether to take off the Stop on our futures contract since we're theoretically covered by the option contract. I think if we come down as far as the Stop, then we're in serious trouble. Since the advantage of holding the futures through the Stop level would be that we don't need to decide where to re-enter the trade and most likely lose some possible profit by waiting for a good buy signal. We also would save on commissions, but they are negligible on this trade.

So given that, plus the fact this futures contract will expire on July 14th, and we need to roll forward to the September contract anyway, I decided to leave the Stop on.

It will be important to liquidate our hedge quickly if sentiment turns around. Because of the size of the hedge and its proximity to expiration, it would lose value quickly.

I try to stay away from fundamentals because there is so much bad information and manipulation out there, but I wanted to include the reason for the deviation of our bullish trajectory at the beginning of this trade is due to a change in the weather forecast for the new September crop in the USA.