A strategy idea for options trading investors.

Overview – Archer Daniels Midland (NYSE: ADM)

Archer Daniels Midland Co. (NYSE: ADM) procures, transports, stores, processes, and merchandises agricultural commodities and products.

In these markets it is time to be defensive. I am going to go back to my old line that “you can’t barbeque an iPad” and say it is time to invest in things people need, not what they want.

We think that one sector that will outperform the overall market is soft agricultural commodities and the companies that manufacture and transport them for the following reasons:

1)      No matter where the stock market is, people need to eat.

2)      The weather patterns around the world have been erratic and crop production and output is weak and uncertain at best, which is bullish for these products.

3)      In a rising or falling market, food demand does not vary, the quality of food, or choices vary. The example being, do you eat steak or chicken, chicken or pork, pork or rice? You might move down the chain, but consumption will be there.

4)      Agricultural commodities will have support from underdeveloped economies and countries as none of these governments can deal with the unrest of the short time ago due to food inflation and shortages on wheat or corn.

Options Trade – ADM Buy-Write

I would buy ADM stock and sell the ADM Sep 31 Calls.

Buy ADM at 29.55; sell September 16, 2011 expiry 31 Strike calls at $0.95 cents.

Net cost: $29.55 – 0.95 = $28.60

Max Loss: If ADM goes to zero, the $28.60 paid per share.

Max Profit: Cost of Stock – (31 strike + premium received) = 29.55 – 31.95 = $2.40

Call away premium: $2.40/29.55 = 8%

** Always remember, one option contract is equal to 100 shares of stock.

Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.