Stock Investing Guide

The time might be approaching for a short-term trade betting against the hysteria enveloping the agriculture complex.

Until last week, the majority of macro and quant-strategy hedge funds were heavily long the grain trade. Reports late last week in The Financial Times show a slew of traders dumping the grains as financial markets tumbled; corn, soybeans, wheat and other grains rallied sharply on Friday following a big sell-off earlier in the week.

Corn, wheat and soybean prices have surged 70% to 100% over the last 12 months following some of the worst grain harvests in decades and a boom in hedge fund and ETF buying. Government hoarding, near-disastrous droughts and climate change have all impacted crop yields.

The financial press is also long the grain complex with a deluge of editorials exclaiming the dangers of food shortages, plunging crop output and the consequential unrest spreading across North Africa, the Middle East and India.

There’s no doubting the world is outgrowing its food supply. I’m a big believer in that theory as presented by author and environmentalist, Lester R. Bro

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Tim Bourquin: John, can you explain how you find good trades?

John Gilner: Because I am primarily focused on index options, there’s a good measurement for that volatility and therefore, the price of the options of course is the VIX. And so, the basic principle there is you need to develop an ability to understand if options are priced high or priced low relative to the expected volatility of the underlying instrument. So, during the course of trading options, what I was always trying to do is sell expensive premium and buy cheap premiums. And so, you’re generally always looking for ways to buy cheap and sell expensive. In all of trading, you have to try to be careful not to think of it like you would think of a salary that you earn at a job because my experience at least, is that my profits are a lot lumpier from that. That’s in a general sense.

Now, I think when it comes to options trading, that’s even more true because what you’re trying to do in options trading, particularly, well, it’s really true on the long and short side but particularly the short side where you’re trying to sell expensive premium.

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