A Trade To Remember For Your Calendar: Straddling The Ags Reports Using Nadex Spreads

The following article was first published two years ago. To read the original, click HERE.  It has been updated with this year's dates, but should serve as a reminder of what can happen when news reports are issued.

Did You Remember?

Yesterday, January 12, the USDA (United States Department of Agriculture) released the WASDE report and the Crop Production Annual Summary at 12:00 PM ET. When this report is released, you usually see a massive move in the Ags markets, like corn and soybeans.

To be directional during this time is extremely dangerous, as the moves can be massive.

As a trader, you could have decided not to take a direction on this report. Instead, you could have used a unique variable payout contract called a Nadex Spread. You could buy the upper spread and sell the lower spread to do a straddle. Some traders know about Nadex binaries, but they do not know they have a unique contract called Nadex Spreads.

You can use Nadex spreads to be directional, straddle the market on news reports, or even hedge risk on futures and Forex contracts with capped risk and massive leverage without any stops.

Nadex Spreads Are Simple Instruments With Capped Risk:
With a Nadex spread, there is a floor and a ceiling. You may buy or sell the spread. In all cases, your risk is capped and cannot increase. You cannot be stopped out of a trade (think call/put options), except with one day or less until expiration every single day of the business week.

You still obtain the massive leverage more often than a futures or forex contract and much more leverage than a stock margin (even better than day trading margin).

The best part is you get access to this leverage without having the risk of ever receiving a margin call, since risk is capped and the full risk for margin is put up front. You can enter and exit before expiration.

Profit/Loss Value (Tick/Pip) on Nadex Spreads Are Easy:
On all spreads, every tick/pip is worth $1.00. A one tick move is worth a $1.00 increase or decrease in the spread.

This is great, as if you have ever traded futures or forex, you know the challenges that come with tick size and value. So you don't have to worry about quarters and eighths of cents on futures or fx pip conversion etc.

NOTE: (A tick/pip is the minimum increment move that the contract bid/ask is quoted in, like on a stock quoted in cents and the minimum increment move is one cent).

As a review of the corn straddle trade on January 10, 2014 see the spread charts and the chart of corn ZC 03-14 aka ZCH4 below.

With this trade you could have both:

Bought the Corn 410.0-430.0 (2:15 PM ET) Expiration contract for 412.4

The risk on the trade was $24 [412.4 (bought price) - 410.0 (bought spread floor) = 2.4 / .1 (tick size) = 24 ticks = $24 max risk]

The profit potential of the trade was [430.0-412.4 = 17.6 / .1 (tick size) = 176 ticks = $176 profit potential]

And

Sold the Corn 390-410 (2:15 PM ET) Expiration contract for 407.4

The risk on the trade was $24 [407.4 (sold price) - 410.0 (sold spread ceiling) = 2.6 / .1 (tick size) = 24 ticks = $26 max risk]

The profit potential of the trade was [407.4 - 390.0 = 17.4 / .1 (tick size) = 174 ticks = $174 profit potential]

The Result:

As you can see, the bought spread flew up and through the ceiling, expiring at 2:15 at max profit of $176 per contract. The sold spread drifted down some and became worthless, losing the max $26 and stopped quoting as it was out of the money.

Next Opportunity To Mark On The Calendar?
The next WASDE reports are scheduled to be released on the following dates in 2016 at 12:00 noon ET

January 12, February 9, March 9, April12, May 10, June 10, July 12, August 12, September 12, October 12, November 9, December 9 (Source: http://www.usda.gov/oce/commodity/wasde/). The WASDE report alone can have a large impact on the Ags markets. It is worth reviewing past charts on corn and soybeans to see the price impact by the news.