The March CBOT Wheat chart has been catching my eye lately. I actually began writing this post last week because of the channel wheat has been forming. I was anxious to see which way this market will end up breaking out. (Break Out: A price movement through an identified level of support or resistance.) I like short option strangles (an option strategy where the trader holds a position in both a call and put with different strike prices) typically and this was one market, currently, that can cause a good trade to go bad real quick shorting options. Take a look at last weeks chart of March Wheat.
As we see in the chart, courtesy of the OEC Trader platform, we have been trading in a channel (sideways trend). (Horizontal Channel or Sideways Trend: describes a rectangle pattern where buying and selling pressure is equal and direction of price is sideways.)Also note we saw a sideways pattern prior this summer’s spike in prices. A sideways market can be a disaster waiting to happen for any short option trader. After the breakout occurs it could create some opportunities, if we see any spikes in volatility.
Based on the fundamentals that we have seen lately the general consensus is bullish for the grain markets. We were expected to see moisture in theMidwestthis last week, but not enough to make a real impact on the drought we have been experiencing. So the crop condition continues to decline, but we have an entire winter and spring ahead of us to add moisture to this area. That being said perhaps it is too early to add any risk premium.
Today, we finally saw a bearish breakout. Looking at the most recent chart provided we can see some minor support around 8.00, but as mentioned above the fundamentals have been bullish. Today the USDA released the WASDE report that was bearish for the grains. I cannot say for sure which way this market will head but it has plenty of room with little support to continue to sell off.