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The Case Against Crop Prices, and Why JPMorgan Hasn’t Found a Bottom

Alex Rosenberg|Producer, CNBC
Monday, 9 Jul 2012 | 2:29 PM ET

If you thought JPMorgan and agriculture prices have little in common, you’d probably be right. But they do share one characteristic — they are both headed lower, if the traders on Friday’s "Options Action" are correct.

Let’s start with the bearish call on the beleaguered bank. The “London Whale” loss has already caused plenty of trouble for JPMorgan stock — it’s down 25 percent from its March high. But RiskReversal.com’s Enis Taner thinks the loss will cause more problems than have already been priced in. In his view, the loss will lead to greater regulatory scrutiny, and will ultimately cause more damage to the bank’s earnings than investors expect.

So as a bearish play, Enis sold the 35/37 call spread — see his trade and breakdown below.

ENIS’S JPMORGAN TRADE

• SELL THE AUGUST 35-STRIKE CALL FOR $1.15
• BUY THE AUGUST 37-STRIKE CALL FOR $0.50

HOW ENIS’S JPMORGAN TRADE MAKES MONEY

• PROFITS BELOW $35.65
• LOSSES BETWEEN $35.65 AND $37.00
• LOSSES CAPPED AT $37.00

On to the next bearish trade. Oppenheimer’s Carter Worth looked at several charts of an ETF that tracks agriculture prices—the DB Agriculture Fund. With components such as corn, soybeans, sugar, and cattle, this ETF has risen precipitously as a Midwestern heat wave and drought have threatened crop supplies. Yet as he analyzed the charts, Carter made the case that the DBA has become a bit, well, overheated. Corn and soybean prices are both at or near all-time highs, and precisely because crop prices are weather-related, they tend to spike and collapse. Carter’s forecast is that a collapse is coming.

Since he agreed with Carter’s bearish call, CRT Capital’s Mike Khouw elected to buy a put. Specifically, he picked up the August 29-strike put for $0.65.

And he wasn’t the only one. As of noon Monday, that August 29-put saw almost 5,000 contracts change hands, for more than double the volume of the rest of DBA’s put strikes combined. As Sally Field once said — “You like me. You really like me.”

Mike’s trade and payout are below.

MIKE’S AG ETF (DBA) TRADE

• BUY THE AUGUST 29-STRIKE PUT FOR $0.65

HOW MIKE’S AG ETF (DBA) TRADE MAKES MONEY

• PROFITS BELOW $28.35
• LOSSES ABOVE $28.35

Watch Options Actionon CNBC Fridays 5:00pm ET, Saturdays at 6a ET and on Sundays at 6a ET

Questions, comments send them to us at: optionsaction@cnbc.com

  Price   Change %Change
DBA
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JPM MLP ETN
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