CORN-Y

There was an article in ZH today talking about how corn futures stopped trading for the day due to massive price movement:

"Back in April, when we first discussed the hike in daily corn trading limits from $0.30 to $0.40, we had some cynical observations, namely that "inviting not only more vol (read bottom line for the business) but more margin, the CME is exposing speculators to far greater impacts from margin hikes (and drops). Which of course means a far great capacity and ability to kill any commodity rally dead in its tracks." Well, there is no margin hike today (yet), although based on today's action we fully expect one. The reason, we are currently at today's down 40 cent limit, a price of $5.925 a bushel, the lowest since July 1, and by the looks of things it will get far worse: as the chart below demonstrates right now sellers outnumber buyers by a ratio of 2000 to 1. Expect this ratio to get even bigger once the CME hikes corn (and who knows what other commodity) margins as soon as today."

With this information, I did some really really quick research and came up with a trade.

My trade thesis is:

1) With the 40 cent limit being hit (so much more selling interest compared to buying), a potential margin hike due to crazy volatility, and the retreat from commodities into cash... my guess is that corn futures prices will probably gap down again at the open.

Here is the graph of CORN, an ETF that follows the price of corn futures. If you look the last bar chart is the price movement today, and the 2nd to last is the price movement yesterday. Look at that huge gap down. I definitely think that if nothing else comes out of this, there will be a margin hike that will force selling of corn futures, lowering the price of them... lowering the price of CORN, putting any shorts in the money.

More about CORN. http://etfdb.com/2010/corn-etf-corn-debuts/

Vermont-based Teucrium Trading LLC

Teucrium Corn Fund ETV (CORN)

Like most commodity ETFs, CORN will achieve exposure to the underlying commodity through futures, in this case contracts traded on the Chicago Board of Trade. But unlike a lot of products out there, CORN won’t invest exclusively in near month contracts; assets will be split between second-to-expire futures (35%), third-to-expire futures (30%), and futures expiring in the December following the expiration month of the third-to-expire contract (35%).

There are many risks to consider in this trade, here are a few of them:

• CORN price tracking with corn futures price. (Considering this ETF is based on multiple corn futures contracts, this risk seems very small)
• Rise in the price of corn futures. Very possible with such a large gap down. This of course is the biggest risk.
• Settlement dates interfering with prices. The settlement date just passed (in Sept), and if you look at the ETF's composition, it appears that the any movement in settlement is largely offset by the proportion of long-term contracts.
• Counterparty risk. Who is Teucrium Trading? They have multiple commodities ETF's and look to be a pretty solid company. Besides, if you're shorting...

Good luck and happy trading.

Disclosure: I am currently short CORN.