Trade Summary: March 10, 2014

| March 10, 2014

March 10, 2014

 

 Trade Rationale

The biggest news over the past few weeks has been the developing crisis between Ukraine and Russia.  The situation is consistently making the headlines and certainly has the potential to roil the financial markets.

In fact, when the world first learned of Russian troops entering Ukraine, the stock market got hit pretty hard.  It wasn’t until Russia backed down to some extent that the market recovered.  Nevertheless, the situation is a long way from being resolved.  And, the potential for increased market volatility is lingering in the background.

In the meantime, Ukraine serves an important role as a global commodity provider.  Disruptions in the region could heavily impact the price of agricultural and energy products.  For instance, Ukraine is one of the biggest producers of wheat and corn in the world.  Also, several major pipelines run through the country which provides Europe a large portion of its natural gas.

Now, we recently took a short position on natural gas because I believe prices are headed down over the next few months.  As such, we’re going to ignore any short-term impact the Ukraine situation may have on that particular commodity.  However, I believe grains could be in store for a sustained run higher after stagnating for much of 2013.

First off, we’re going to set ourselves up to capitalize off a boost in grain prices by buying calls on Potash (POT).  As one of the leading fertilizer producers in the world, POT will benefit strongly from an increase in the price of grains.

We’re also going to take a call position on Deere & Company (DE).  Of course, DE is one of the most prominent agriculture equipment companies in the world.  The business will certainly benefit from a rise in grain prices.

While companies dealing with the production of grains tend to benefit from a rise in prices, it’s the opposite for those having to buy grains.  Most food production companies see increased costs from rising grain prices as their inputs become more expensive.  This can lead to lower profits.

One such company dealing with this very issue is General Mills (GIS).  As a popular producer of consumer foods such as breakfast cereals, GIS will certainly feel the impact of higher corn and wheat prices.  As such, we’re going to make a put trade on the stock.

Let’s take a look at the trade specifics.

 

Trade Details

#1) Buy Potash (POT) June $35 Calls up to $1.75

We’re looking for POT to move higher.  Our first profit point for conservative traders is at $37.  For aggressive traders, you can hold up to $40.  Regarding risk control, the conservative exit level is $32.  $30 is the final support level for aggressive traders.

Potash

#2) Buy Deere & Company (DE) June $90 Calls up to $2.50

Like POT, we want DE to trade higher.  Our first exit point for conservative traders is at $91.  For aggressive traders, you can hold up to $94.  For risk control, the conservative exit level is $84.  $80 is the final downside exit level for aggressive traders.

Deere & Company

#3) Buy General Mills (GIS) July $50 Puts up to $2.15

In this case, we want GIS to trade lower.  Our first profit-taking exit point for conservative traders is at $47.50.  For aggressive traders, you can hold to $45.  For risk control, the conservative exit level is $52.  $54 is the final exit level for more aggressive traders.

General Mills

 

Category: AOA Trade Summary