The Cascade Trade
Three carbs and diet bonds
You do not need to know whether Trump chooses war or peace to make money in markets.
You need to know what the market has priced and what it hasn’t.
Peace is linear: bounded, visible, mostly priced. War is exponential: the market prices each broken node with a lag. That is the trade.
This piece is dense. The short version: we’re buying call options on corn, wheat, and sugar, hedged through European and UK front-end rate options. If war escalates, the food trades pay 10-30x. If central banks blink, the rate options cover the cost.
Betting markets give a ceasefire by end of April less than a 30% chance. The grain calls sell insurance against a cascade that the market itself doesn’t expect to resolve quickly. That also means assets aren't priced for a quick resolution. A peace deal that reopens the strait would reprice violently in the other direction.
Where the Value Is (and Isn’t)
Different markets are pricing different wars. If rates and commodities are right, equities aren’t down enough. If equities and commodities are right, long rates haven’t risen enough. If equities and long rates are right, the short end of the curve is unreasonable and central banks won’t tighten this much. That inconsistency is the opportunity.
Let’s start with the market on everyone’s home screen: oil.
Spot energy and first-order oil trades appear mostly priced. We have about 60bps of June 85/95 call spreads we picked up for ~30bps after the front end collapsed from 120 to sub-$80 a couple of weeks ago.
They’re mostly trading at intrinsic given the skew, and they give the book a little direct sensitivity we’re happy to hold, but there’s not that much value here anymore. At this point everyone who wants oil exposure has it. CF Industries is up 65% YTD with a DOJ probe. Tanker stocks have doubled on rates that collapse the moment a ship transits. Many of these positions are expensive if not outright sells.
Structural US energy advantage is where it gets interesting. The spread between Henry Hub and international LNG is the widest since Ukraine because the US is already exporting as much natural gas as its infrastructure allows. We think US LNG exporters and pipeline companies benefit whether Hormuz reopens or not. The world has just learned that Gulf energy infrastructure can be destroyed by precision strikes, which should provide a backdrop for investment into this space. Regular readers will know we’ve had positions in Kinder Morgan (KMI June 38 & 40 calls for 22bps of book in premium), NextDecade (NEXT shares, 34bps), Energy Transfer (ET shares, 33bps) and DOW Chemical (DOW shares, 18bps) for a couple of weeks.
The offsets everyone cites are temporary. If the strait stays closed or disruptions get worse, the oil shock is enormous relative to anything the market has priced. But again, more oil. The US Energy ETF XLE has been going up in a straight shot for this reason. This isn’t where the edge is.
Fertilizer to Food (Node 2): underpriced. The grain market has moved maybe 10-15% of the terminal price impact from yesterday’s yield cliff model. The damage is invisible until harvest, five months away. This is where we want to be.
Industrials (Node 3): unpriced but maybe too early. Copper is flat-to-down while 9-14% of global supply faces physical shutdown from sulfuric acid shortage. The sulfur-copper linkage is the one to watch. If copper sells off strongly we’ll likely open a position, but we think the market may still want to sell copper on the demand story before folks catch this nuance.
Three Grains, Three Channels
A lot of folks think of me as a “commodities guy” but I certainly wouldn’t call myself an agriculture guy. More everything but (energy, metals, critical minerals). There are people at Cargill and the big trading houses who have forgotten more about trading ags than I have ever known.
That being said, when we look at the market with an eye for convexity, I kept coming back to the stuff that needs a lot of fertilizer in the ground at very specific times or things go bananas.
Without a deep view on any one of these particular markets, we want the basket: corn, wheat, sugar. Each captures a different node of the cascade. The market has started to price one of them (wheat). It hasn’t touched the other two.
Corn has three independent legs that compound. First, nitrogen: corn takes 150-180 lbs per acre vs wheat at 60-100, so at $931 urea, the cost hits corn acreage first and hardest. USDA Prospective Plantings drops Tuesday and that’s where a nitrogen-driven acreage shift shows up. Second, ethanol: 40% of US corn goes to ethanol under the RFS mandate. At $120 crude, corn can go to $8.80 before ethanol demand destruction. At $150, the ceiling is above $10.50. The same event that causes the nitrogen shock pulls the demand ceiling up. They compound. Third, you can’t replant corn in August. The Hormuz cascade vol sits on top of seasonal weather vol (pollination in late June/early July). Two independent variance sources in the same contract. (The full vol analysis and strike selection math are in Appendix A.)
Corn sold off late today ahead of the USDA report. If the report shows nitrogen is pushing farmers out of corn, that’s the first confirmation of the supply leg.
Wheat is the global food security commodity. MENA and EU import calories as wheat, not corn. When the cascade hits headlines, wheat is where the panic premium lands. Wheat gapped $13 to $618 on the Sunday open after the Houthi news. Faster fuse, more expensive entry.
Sugar runs through Brazil. Mills choose between sugar and ethanol every crush season based on the price ratio. At $150 oil, the economics flip to 55-60% ethanol, pulling 10-15 million tonnes off the global sugar export market. Brazil is 40% of world sugar exports. Two independent expressions of the same oil-to-food cascade, running through different countries’ agricultural systems.
The Trades
Corn December 525 calls. Options on Dec futures, expiring in June (89 days). Around 11-13 cents at the ask. $625 max risk per contract. Corn at $461, strike 13.7% above spot. Base case (+30% from yield model): corn to ~$600, call pays 6x. High case ($150 oil, nitrogen squeeze meets ethanol pull): corn above $800, call pays 22x.
Wheat July 710 calls. Around 11-12 cents, 1.6% of spot. Strike 14.9% above spot. Why $7.10 and not $6.50? Wheat has already moved. The $6.50 is only 5% above spot, mostly delta, not convexity. Open interest at $6.50 went from nothing to over 1,000 contracts in March. The $7.10 is genuine optionality.
Sugar July 18 calls. Around 0.30-0.33 cents. $370 max risk per contract. At $150 oil, sugar above 25 cents, call pays 21x. At $200, sugar past 30 cents, 36x.
Total grain premium: ~$1,500 per set of three options. Three independent cascade channels. Three independent catalysts. Scale to your needs.
The Peace Hedge
The grain side is relatively clean. Oil is up. There’s a supply shock in fertilizer. US agricultural markets aren’t pricing in sustained pain. Buy calls. Pretty simple.
The other leg is where the problem gets harder, and where we really struggled to find something that had the right directional properties, the right risk properties, and the right liquidity.
TLDR, in the end, we bought bonds. Lol.
The first version of this post spent a lot of time trying to be too cute. Buy options on X to profit if Hormuz stays closed, sell options on Y to cover the cost if peace breaks out. Came up with some plausible constructions that lasted right up until the markets opened. No perfectly hedged trade survives first contact with a messy open.
We came close to selling put spreads on airlines (LUV) and Korean equities (EWY). Not to say these are bad trades, and we still might do them. But the more we looked, the more we felt we weren’t selling expensive options, just fairly priced ones with a decent chance of leading to losses. The basis risk (oil up, ags flat) was enough to walk away. (Full walkthrough in Appendix B.)
Which brought us to rates.
The bond market in Europe is not loving this whole oil/energy thing. So much so that it moved, quickly, from pricing in a decent amount of easing to pricing in a bunch of hikes. Particularly in the UK, where not only was the move most pronounced, but the economy was already pretty weak.
Then, as we were searching for the trade, our old friend and short rates guru Jason Rotenberg published: My Nomination for a Peace Hedge: UK Front-End Rates. He says it better than I can. Go read his version. The short version:
The Bank of England was priced to ease 50 basis points and is now priced to tighten 75 basis points. That’s 125bp of repricing in a month, into the weakest economy in the G7. If this resolves, that unwinds fast. If it doesn’t resolve but the growth shock dominates, rates still come down.
UK wage pressure has been falling steadily. The BoE would be fighting the last war. An energy supply shock is not demand-pull inflation. You don’t tighten into an external cost shock when your economy is running on fumes.
We wanted to buy SONIA options on ICE. The instrument that sits at exactly the point on the UK curve where the mispricing lives. And then we realized our ICE Futures Europe permissions weren’t even enabled. “The machine is down,” as we say. We submitted the request. It’s pending.
In the meantime, we bought Schatz (German 2-year bond) Sep 106 calls on Eurex for roughly 80bps, and some intermediate US Treasuries (IEI) as a bridge because the duration hedge to our short credit trade had rolled off. It’s boring. It’s a placeholder. It gets replaced by SONIA when permissions clear. For those trading at home, who are ok with the currency exposure (a big if), there’s a couple of retail ETFs you can look into.
The honest summary: the grain book is on and we’re confident in it. The peace hedge is being built this week.
