Back in April we told you about some of the ways fund managers were using options to lay down low-risk bets on rallies. While these plays were designed as lottery tickets to capture a summer weather rally, the big move in soybeans over the last six weeks paid off with seven figure profits when these funds started liquidating the positions last week.
Two types of trades were involved.
The first was a deep out-of-the-money bull call spread. For this trade one fund bought 10,000 August $12.60 calls for around 1 3/8 cents each, paying for nearly half the cost of the trade by selling 10,000 August $14 calls for 5/8-cent. Each 5,000-bushel contract cost just $37.50, before commissions and fees.
Those trades were put on April 4. Late last week the fund began taking profits, with the $12.50 calls around 14 cents and the $14 calls around six cents. That meant a net profit of around 7 cents a bushel. Though it’s impossible to tell for sure, at least 2,000 of the spreads were liquidated. Each one brought a profit of around $350, or $700,000 in all.
The second trade was a deep out-of-the-money ratio call spread. The fund paid for 15,000 August $12 calls by selling 7,500 August $11.40 calls. Each call sold for 2 ¾-cents paid for all but ¾ cents of the 2 calls bought for 1 ¾ cents each, not including commissions and fees.
The logic behind this trade, put on April 5, was that the two calls bought will rise in value faster than the one call sold. And that’s indeed what happened. The swift rally in soybeans in April and May lifted the $11.40 calls to around 33 cents when they were liquidated last week. But the $12 options were above 21 cents, or around 43 cents for the pair. That mean each trade netted around nine cents, or $450. Around 5,000 of the spreads were liquidated late last week. Total estimated profit: $1,125,000.
The trades illustrate another tactic of fund managers: Don’t look a gift horse in the mouth. Few traders anticipated the big rally in soybeans would happen so quickly. When it gave them a good return, they weren’t afraid to book some profits.